Overdraft protection is a feature offered by banks to keep your checking account from overdrafting when you write a check or swipe your debit card but don't have enough money in your checking account to cover the balance. Overdraft protection links your checking account to a savings account, credit card, or line of credit and uses that account to pay transactions that would have otherwise triggered an overdraft fee.
Credit Card and Line of Credit Overdraft Protection
You must be careful when overdraft protection is linked to your credit card. Some credit card issuers treat these overdraft payments as a cash advance. That’s a bad thing because cash advances often have higher interest rates, no grace period, and a cash advance fee. You could end up paying just as much, and possibly more, on the cash advance as you would have paid in overdraft fees.
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, you might be charged an overdraft fee anyway.
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 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.
