How Overdraft Protection Transfers Work

Debit cards connect to your checking account for a reason — you’re most likely to spend money from that account. But if you don’t have enough money in checking to make a purchase, handing over your card is like giving a cashier a $5 bill for a $12 pizza.

That’s where overdraft coverage and overdraft protection transfers come in.

Normally, when you spend more than you have, purchases get declined. But financial institutions offer ways to prevent this from happening. Through overdraft coverage, a bank uses its own money so you can pay for that pizza, or whatever you’re buying. You have to opt into this, and it’s an expensive service. The median overdraft fee that banks charge is $34 for what amounts to a very short-term loan.

» MORE: Overdraft fees: What banks charge

And things can get worse. If you don’t pay your bank the fee and the money you were short, your checking account remains negative. So the next thing you buy can trigger another overdraft fee. This continues until you pay everything back.

But many banks offer an alternative: overdraft protection transfer services. With overdraft transfer services, your transactions can still go through even if you’re short on dough, and you can avoid expensive fees.

The basics

An overdraft protection transfer is an opt-in service that lets you connect your checking account to another account at your bank, typically either a savings or credit account. When your checking balance is too low to cover a transaction, your bank automatically moves money to checking from the linked account. Although overdraft protection can technically refer to any service where a bank provides overdraft coverage, it primarily refers to these transfers.

» MORE: Overdraft fee basics

Linked checking or savings account

When you connect a savings, money market or second checking account to your main checking, you cover any overdrafts with your own money. Because a bank does the transfer for you, there is typically a fee of around $10 or $12. Unlike with overdraft coverage, though, you usually get charged this fee once per day instead of per transaction.

Keep in mind that a federal rule allows only six transfers per month from a savings or money market account. So if you tend to transfer money out often, be careful. Some banks charge an excess transfer fee after the sixth one.

Linked credit account

You can also connect your checking account to a credit account, such as a credit card, personal line of credit or home equity line of credit. You’ll pay interest on the overdrawn amount and possibly a transfer fee like you would with a linked savings.

Some banks have overdraft lines of credit that charge you interest at a variable rate and no fee. Whatever your bank offers, you’ll have to pay the balance by a due date. Credit accounts are subject to credit approval, so this option isn’t guaranteed for everyone.

» MORE: How to avoid overdraft fees

Word of caution

Although overdraft protection transfer services can be a low-cost alternative to bank-funded overdraft coverage, there are some things to be careful of:

• You can still overdraw your checking. The overdraft protection transfer service only works if you have the funds to cover a transaction that’s more than your checking account balance. Otherwise, overdraft coverage can apply, and your bank might cover the transaction and charge an overdraft fee.
• More than the exact amount might end up in your checking. Banks have their own overdraft practices, which include how much money they transfer from a linked account. Some transfer money in multiples of a certain amount, such as $50 or $100, which might not work best for you if you like to control how much stays in your savings. Worse, you might have enough to cover a transaction but not enough for the amount your bank wants to transfer.
• Your bank doesn’t have to cover the transaction. Like overdraft coverage, an overdraft transfer is a courtesy service, so your bank isn’t required to pay your overdrafts.

» MORE: NerdWallet’s best checking accounts of 2016

Should I opt in?

Consider how you normally manage your money first. If you know that you rarely overdraw a checking account, opting into an overdraft protection transfer service can prevent you from getting hit by a steep overdraft fee. But if you tend to overspend, it’s better to not be in an overdraft program. Having a transaction declined can make you aware of overspending habits and help you avoid finding out later about an overdrawn account and fees. You don’t want to get comfortable spending more than you have, especially from a checking account.

Overdraft protection transfers can help for the occasional overdraft, but these programs should never replace healthy money habits like keeping enough in your checking account for your everyday transactions.

Spencer Tierney is a staff writer at NerdWallet, a personal finance website. Email: spencer@nerdwallet.com. Twitter: @SpencerNerd.