Understanding Overdraft Protection

Post date: 6/1/2021
Availability and special terms subject to change.


Not all financial institutions offer the same great features. Here’s the low-down on how overdraft protection works and what to evaluate.

What is an overdraft?

An overdraft occurs when you don’t have the proper amount in your checking account to cover a transaction. The transaction can be a written check, a debit transaction at the store or online, a restaurant, an automatic ACH (electronic) bill pay transfer or ATM cash withdrawal. When an overdraft is covered, a fee is incurred for convenience and peace-of-mind protection. You will also be saved the embarrassment of a returned item and incurring returned-item fees.

Using a service like Overdraft Protection will usually not impact your credit report — unless you default on the balance owed. If you don’t use your overdraft plan, it will not appear on your report.

How does it work?

When an overdraft is paid, it’s an automatic transfer to cover the balance due. Institutions typically offer Overdraft Protection amounts of $100 to $1,000 (depending on your account history and credit risk).

However, if you have funds in your regular savings, many financial institutions (including us) may transfer the money from your savings or share account before Overdraft Protection kicks in. There is usually a fee for this transaction but less than an Overdraft Protection fee.

Please ask the institution which option kicks in first — this can impact the charges you incur.

What approval is required?

You will need to “opt-in” to take advantage of Overdraft Protection. Also, a financial institution cannot require you to accept Overdraft Protection or assign it without your permission.

What are the benefits?

You’re saved the embarrassment of a returned item and the additional charges of a returned item. However, it is essential to compare costs. Some banks charge exorbitant fees to cover overdrafts. And never opt-in until you’ve read the fine print.

How long will it take to repay?

Once an overdraft occurs and Overdraft Protection is activated, you can repay the balance in full or take advantage of a payment plan. Most financial institutions provide 30 to 60 days to repay. (At First United CU, you can take up to 30 days to repay.)

How much does it cost?

When comparing institutions, find out the charge per transaction for covering an overdraft. If it’s more than $35, you should probably keep shopping. Also, be sure there are no annual fees for the program or credit line or other unfair restrictions, which First United does not have.

What happens if the balance remains unpaid?

It is considered a default on your account, may appear on your credit report (and potentially impact your credit score) — and often, your account will be closed at the institution.

Are there other options?

Ask the financial institution what options are available. For example, at First United CU, we offer three overdraft options, including using your Visa® Credit Card as a source for Overdraft Protection. It’s convenient, affordable — and another way to cover transactions or tap into your credit line.

If you prefer using your credit card, we suggest you opt out of Overdraft Protection and request using your credit card instead.

How to avoid overdraft charges?

Take advantage of online and mobile banking to track your account. You can stay on top of balance information and check your funds available before making a purchase. Consider adding a “cushion” to your checking account so that you don’t unexpectedly incur an overdraft. You can also take advantage of direct deposit to ensure a consistent cash flow into the account.

Not sure?

If you have questions, please contact us. We can help you compare costs versus features and what type of overdraft account makes sense for you. Like any financial product, when used wisely, it provides convenience and peace of mind.