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Do You Need Overdraft Protection?

You want to feel protected. It’s why you buy health insurance or put a security system on your home. It makes sense. And where better to have protections in place than around your money, right? Eh, not so fast. When it comes to your checking account, most banks are going to push overdraft protection. (In fact, some banks will make it seem like it’s not an option to go without it.) But you don’t need overdraft protection. So let’s walk through what it is, why you don’t need it, and what you should be doing instead.

What Is an Overdraft Fee?

You’re charged an overdraft fee when your checking account balance dips below zero. Basically, your bank or credit union is giving you a financial slap on the wrist when you spend money you don’t have.

Say Tom has $50 in his checking account. He spends $30 at the grocery store, leaving him with a balance of $20. The next day, his $40 electricity bill is automatically withdrawn from his checking account. When that transaction goes through, it puts him -$20 in the hole.

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If you’ve ever overdrawn your bank account, then you know what comes next. Yep, Tom’s bank hits him with a $30 overdraft fee. Now he’s $50 in the red!

Overdrawing your checking account stings. It’s like getting kicked when you’re already down. But if this has happened to you, know you’re not alone. Banks are swimming in the overdraft fees they collect. In recent years, big banks, small community banks, even credit unions, have scooped up more than $34 billion in overdraft fees.1 And what’s even worse is the people who are most affected by those fees are the ones who can afford them the least. Just 9% of account holders pay for nearly 84% of overdraft fees.2

Depending on the bank, overdraft fees may range from $20–40. Some banks might charge you a fee for each day that your account stays below zero, while others charge a fee per transaction. Say you overdrew your account five times in one day. Well, when those transactions go through, your bank could charge you a fee for each of those five transactions—that could cost you $200! That’s just shameful!

What Is Overdraft Protection?

Banks are no dummies. “Overdraft fee” sounds terrible. Any bank customer will hear that and know it’s bad news. But “overdraft protection” sounds like it could almost be helpful. And of course, that’s what banks are banking on—that you’ll think they’re protecting you.

Overdraft protection is a “service” banks offer to cover you when you’ve overdrawn your checking account. Think of it as a super short-term loan with an interest rate pushing 1,000% or more.

Overdraft protection is as much of a scam as overdraft fees. If banks never allowed you to spend money you didn’t have (aka declining transactions at the register or ATM), then they wouldn’t need to charge overdraft fees. And if they didn’t charge overdraft fees, then overdraft protection wouldn’t need to exist.

Legally, banks can’t automatically enroll you in overdraft protection. But banks are so slick that more than half of people with overdraft protection don’t remember signing up for it. And 75% of people say they would rather just have their bank decline the transaction than have it go through and get charged a fee later.3

Let’s take a look at the most common types of overdraft protection.

Types of Overdraft Protection

There are three main types of overdraft protection. (And remember, your bank cannot sign you up for overdraft protection without your permission. So, don’t do it!)

1. Agree to overdraft fees.

This is the most basic form of overdraft protection. You agree to pay a fee, usually between $20–40, if your balance goes below zero. Again, you could actually end up paying multiple fees depending on your bank’s rules about negative account balances.

2. Connect your checking account to your savings account.

Connecting your checking and savings accounts is not a bad thing. It makes transferring funds super easy. But when it comes to connecting them for overdraft protection purposes, just say no.

Here’s how it works: First, your bank will connect your checking account to your savings account. Then, if you overdraw your checking account, your bank will automatically transfer money from your savings to your checking to make up the overdrawn difference.

You probably won’t be surprised to learn that most banks will charge a fee for this “service.” That’s right, expect a $10–15 fee just for your bank to move your money from one account to the other. And here’s something else banks are counting on: If someone doesn’t have enough money in their checking account, chances are probably pretty good they won’t have the backup funds in savings either. Cha-ching—now they can just move forward with the original overdraft fees.

3. Connect your checking account to another line of credit.

If you’re still using credit cards, banks will gladly connect your checking account to your credit line. Even better if it’s one of their credit cards! (But, real talk, if you’re still using credit cards, it’s time to get out the scissors and cut up those suckers once and for all!) When you overdraw your checking account, the amount you went over gets tacked onto your credit card balance. So, now not only has your bank allowed you to spend money you don’t have, but they’ve also put it on an account that’s going to charge you interest. That is not a service you want!

The bottom line is this: You want to avoid having to choose from any of these options. If you’re overdrawing your account again and again, you need to take a look at your budgeting practices. A budget is a plan for your money, and it’s a must-have if you’re going to win with money. The more you do it, the better at it you get. And then you can be done with overdraft fees for good.

Your Overdraft Protection Alternative

Here’s the good news. You don’t have to get caught up in any of this overdraft protection business. When you choose a bank, whether it’s a huge corporate bank or a small-town credit union, ask about their overdraft policies. Make sure you’re clear on what the fees and penalties are. Make even clearer that you’re not interested in overdraft protection.

When you decline overdraft protection, you’re giving your bank permission to decline transactions if you don’t have the funds to pay for them. How’s that for some good ol’ fashioned common sense!

But here’s an even better idea. Get a better bank. Instead of trying to understand confusing bank policies designed to hurt you, choose a bank that wants to help you get out of debt, save money, and build the life you’ve been dreaming about.

That’s why we’re building Gazelle, a new banking experience from Ramsey Solutions! We’re ready to help you outrun the normal, debt-driven banking experience so you can win with your money, not lose it in stupid bank fees. (That means no overdraft fees. If you don’t have the money, guess what? Your debit card won’t work!) If you’d like to become one of the first beta users, sign up today!

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About the author

Ramsey Solutions

Ramsey Solutions has been committed to helping people regain control of their money, build wealth, grow their leadership skills, and enhance their lives through personal development since 1992. Millions of people have used our financial advice through 22 books (including 12 national bestsellers) published by Ramsey Press, as well as two syndicated radio shows and 10 podcasts, which have over 17 million weekly listeners. Learn More.

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