Overdraft protection is a safety net from your bank that kicks in when you try to spend more money than you have in your account. Instead of declining the transaction or bouncing a check, the bank covers the difference — and charges you a fee.
It works in several ways: the bank might transfer money from your savings account, credit card, or a pre-approved line of credit. Some banks simply allow the account to go negative (up to a set limit) and charge an overdraft fee — typically $25-35 per transaction in the US.
While overdraft protection prevents embarrassing declined transactions, the fees can add up fast. Americans paid over $9 billion in overdraft fees in 2023. New regulations are pushing banks to reduce these fees — some like Capital One and Ally Bank have eliminated overdraft fees entirely.