Can Your Credit Card Save You From Overdraft Fees?

Man using credit card and phone
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Managing a checking account can be tricky at times. If your balance gets too low, you may trigger overdraft fees: the fee you’re charged whenever the bank funds a transaction that exceeds your checking account balance. For example, if your checking account balance is $15, but you make a purchase for $75, the bank might fund the transaction, but charge an overdraft fee since you didn’t have enough money in your account.

Your checking account balance would be negative by the overdraft amount, $60 in this case, plus the overdraft fee.

One overdraft can lead to a cascade of overdraft charges – where each subsequent transaction causes another fee. Your account balance becomes increasingly negative making it more expensive to bring your account back positive. Some banks even charge an additional fee each day your account balance is negative.

You’re allowed to opt-out of overdraft fees. Instead of paying an overdraft transaction and charging you a fee, your bank would decline the transaction. Opting-out only applies to debit card transactions. Depending on your bank’s policy, some recurring debit card transactions, e.g. your Netflix subscription, may still process and trigger an overdraft.

Credit Cards as Overdraft Protection

Some banks give you the option of using your credit card for overdraft protection, particularly if you have a checking account and credit card with the same bank.

You can link your credit card to your checking account as a backup funding source. Whenever you make a transaction that exceeds your account balance, the bank will advance funds from your credit card’s available credit to cover the transaction.

When you use your credit card for overdraft protection, your transactions will process normally long as you have enough available credit on your credit card.

Your bank account won’t go into the negative, which means you avoid overdraft fees and any daily negative balance fees your bank charges.

The Cost of Using Your Credit Card as a Backup

Even using your credit card for overdraft protection isn’t fee. Your bank may charge a fee (as a percentage of the advance amount) for a credit card overdraft advance. On the plus side, these fees are much lower than overdraft fees. Overdraft advances from your credit card will likely be treated like a cash advance. That means the advance will be charged a higher interest rate and won’t have a grace period. If you don’t pay off the balance right away, the interest you pay could rival any overdraft fee your bank would have charged you.

Of course, if your credit card has enough available credit to serve as backup funding for your checking account, you could use your credit card instead of your debit card to save money on fees and interest. Getting in the habit of checking your balances before shopping can help you make the right choice of card to use for your transactions.

Note for Chase bank and credit card customers. As of August 20, 2016, you can no longer use a Chase credit card for overdraft protection.

Chase customers will only be able to use a savings account as a backup funding source for overdraft transactions. On the plus side, the bank is also eliminating the $10 Overdraft Transaction Fee and will only transfer the amount needed to cover the overdraft, rather than transferring funds in $50 increments.

Using a Savings Account as an Alternative

Linking to a savings account for overdraft protection is less expensive than using a credit card. The bank will likely charge a fee for helping you keep your account from overdrafting, but any fee will be less than an overdraft fee. And, you won’t have to pay interest because it’s your money that being transferred. Of course, if you can anticipate transactions that will overdraft your account, you can proactively transfer money from your savings account to avoid your bank doing it for you and charging a fee.

While savings accounts and credit cards can provide a safety net for overdraft transactions, it’s better to keep your account balance from getting so low that you’re at risk of overdrafting. Aim to keep a buffer amount in your checking account. This buffer is the lowest balance you’re comfortable having in your account. For example, if your account balance reaches $1,000, you start reeling in your spending to keep from dipping below your buffer balance.