What Does Overdraft Protection Mean for Your Credit?

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Banks offer overdraft services to prevent your checking account from overdrafting and triggering an overdraft fee. An overdraft happens when you write a check or swipe your debit card without having enough money in your account to cover the transaction.

If you want to protect your account from overdrafts without paying an extra fee, you can sign up for overdraft protection. Overdraft protection links your checking account to another account and uses that account to pay transactions that would have triggered an overdraft fee. You can use a savings account, credit card, or line of credit for overdraft protection.

To use a credit card or line of credit for overdraft protection, your credit history must be good enough to qualify for the credit product. You'll typically need to have a checking account and credit product with the same bank. The exact qualification criteria will vary by bank.

Without overdraft protection, your bank would decline any transaction over the amount in your checking account. Instead of being charged an overdraft fee, your bank would charge you a nonsufficient funds fee. The merchant to whom you presented payment might also charge a fee in addition to the original amount of the transaction.

Credit Card and Line of Credit Overdraft Protection

Overdraft protection could affect your credit if you've linked your checking account to a credit card or line of credit as a backup source of funding. Some credit card issuers treat overdraft payments as a cash advance. This makes the overdraft protection more expensive because cash advances often have higher interest rates, no grace period, and a cash advance fee. Over time, you could end up paying just as much, and possibly more, on the cash advance as you would have paid in overdraft fees.

Some credit cards have a different interest rate for overdraft cash advances and ATM cash advances. Check your credit card terms for exact pricing.

When your overdraft is connected to a line of credit, you risk paying fees on the overdraft if you don't pay the balance before the grace period runs out (if there is a grace period). If you already have a balance on your line of credit, the overdraft would just be added to your current balance.

If you don't have enough available credit on your credit card or line of credit, your credit card issuer may decline the transaction. You might be charged an overdraft fee anyway.

Impact To Your Credit

The overdraft protection is meant to protect you from the problems that stem from not having enough money in your checking account. However, if you can't afford to clear up the overdraft, you could suffer worse consequences. For example, if your account overdrafts to your credit card and you later miss your credit card payment or default on the credit card, your credit score will be damaged.

If the overdraft pushes your credit utilization above 30%, your credit score could drop because of the higher credit card balance.

Optional Overdraft Protection

Banks now are required to ask you to opt-in or opt-out of overdraft fees. If you opt-out, your bank will deny debit card transactions that are greater than your checking account balance. Instead, you could be charged a non-sufficient funds fee and you’ll have to take care of the transaction with the merchant. For example, you’ll have to go to the merchant and pay for the check or debit card transaction.

Opting-in to overdraft fees means your bank will process transactions that are greater than your checking account balance and you’ll be charged an overdraft fee.