Opt In? How to Decide Whether or Not to Participate in Your Bank's Overdraft Program

You will be able to make withdrawals and purchases, but you will also incur a fee

Opt In? How to Decide Whether or Not to Participate in Your Bank's Overdraft Program
Image: Pixabay
January 20, 2017

If you have a checking account at a bank or a credit union, you may one day have to deal with an overdraft. But is enrolling in an overdraft program the best decision for you?

An overdraft happens when there is not enough money in your account to pay for a transaction and the bank or credit union pays for it anyway. These transactions include withdrawals at ATMs, debit card purchases, checks, and ACH payments like online bill payments. Many banks and credit unions offer an overdraft program to make sure their customers are covered if their balance falls below zero, and such programs may vary depending on the institution.

In general, if you overdraw your account with a check or an ACH, the overdraft program will pay for the transaction and then charge you a fee. The bank or credit union will also in effect take your repayment directly out of the next deposit you make. At most financial institutions, the fee for overdrawing an account is a certain fixed amount regardless of the amount of the transaction, and you can incur several such fees in one day.

These fees work slightly differently for debit cards. Banks and credit unions cannot charge overdraft fees for ATM and most debit card transactions unless you have authorized—"opted in"—to the fees. If you choose to opt into overdraft for these transactions, you will usually be allowed to make such withdrawals and purchases even if your account does not contain enough money at the time you make the transaction. However, you will usually incur a fee on a transaction that settles against a negative balance in the future.

If you have decided not to opt in, purchases on debit cards and ATM withdrawals will usually be declined if there isn't enough money in your account at the time. You will be able to make these withdrawals and purchases when there is enough money at the time you make a transaction, and you will not incur an overdraft fee regardless of whether or not you have enough money when the transaction settles in the future.

Because consumers who opt-in allow their financial institution to charge these fees when an overdraft happens, they usually pay more in overdraft fees than those who opt out. For instance, the Consumer Financial Protection Bureau (CFPB) reported in 2014 that opted-in accounts are three times more likely to experience more than 10 overdrafts per year as accounts that are not. The agency also found that opted-in accounts experience seven times as many overdraft fees as accounts that are opted out.

Regardless of which option you choose, you may still be charged overdraft fees. Even so, however, the decision may be one of the most important choices you can make that will affect how much your checking account costs.

Here are six steps that you can take to lessen or eliminate overdraft fees.

  • Track your balance as carefully as possible to lessen the likelihood that you will overdraft. Sign up for low-balance alerts that will notify you when you are at risk of an overdraft. If you make electronic transfers on a regular basis—such as rent, mortgage, or utility payments—make sure you know how much they will cost and the day on which they will happen. Track your checks and make note of when the funds are deducted from your account so you will not accidentally spend money that you have already paid. You also need to know when your deposited funds will become available to use.
  • Check your balance before making a purchase or withdrawal, then take a moment to figure out whether or not you have any other payments coming up. Just because there is enough money in your account when you're checking out doesn't mean that you will still have enough money when the transaction settles. If you have made transactions that have not yet been deducted from your accounts, these may reduce your available funds in the meantime so that you will not have enough to cover your purchase. Overdraft fees on debit cards can happen on transactions that were originally authorized when you had enough in your account to cover them but that brought the account balance below zero when the transaction settled.
  • Do not opt in. Choosing not to opt-in to an overdraft program—or opting-out if you are opted-in now—will enable you to avoid paying overdraft fees. Remember that this means that your card may be declined if there is not enough money in your account to cover the transaction.
  • Link your checking account to a savings account. If you link these accounts, your institution will deduct money from your savings account to cover the difference in the event you overdraw your checking account. You might have to pay a transfer fee when this happens, but this is usually far lower than the overdraft fee.
  • Ask your institution whether or not you are eligible to get a line of credit or a linked credit card to cover any overdrafts. You might have to pay a fee when the credit line is tapped, and you will have to pay interest on any amount you borrow, but these amounts are generally a less expensive way of covering a brief shortfall of cash.
  • Shop around for another account. Get a list of your bank or credit union's account fees, then compare them with the fees charged by other institutions. Review your own habits and consider what and how many fees you might have to pay. Take into account penalty fees—such as charges for overdraft and non-sufficient funds—in addition to monthly maintenance, ATM surcharge, and other service charges. When making such comparisons, also think about factors like the institutions' hours of operation and locations, the available access to public transportation, available products and services, and customer service reputations.