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Understanding the Overdraft “Opt-in” Choice

Making the right choice for you.

If you have a checking account, you might have to deal with an overdraft fee. An overdraft occurs when you don’t have enough money in your account to cover a transaction, and the bank or credit union pays for it anyway. Transactions include ATM withdrawals and debit card purchases as well as checks and ACH payments (such as online bill payments). Many banks and credit unions offer overdraft programs, and these can vary by institution.

Generally, if you overdraw your checking account by a check or ACH, your bank or credit union’s overdraft program will pay for the transaction and charge you a fee. By allowing your account balance to fall below $0, your bank or credit union will also effectively take the repayment right out of your next deposit. At most institutions, the overdraft fee is a fixed amount regardless of the transaction amount, and you can incur several overdraft fees in a single day.

Overdraft fees work a little differently for debit cards. Your bank or credit union cannot charge you fees for overdrafts on ATM and most debit card transactions unless you have agreed (“opted in”) to these fees. If you choose to opt in to debit card and ATM overdraft, you are usually allowed to make ATM withdrawals and debit card purchases even if you do not have enough funds at the time of the transaction. However, you will generally incur fees on transactions that settle against a negative balance later.

If you have not opted in to ATM and debit card overdraft, debit card purchases and ATM withdrawals will generally be declined if your account doesn’t have enough funds at the time you attempt the transaction. If you have not opted in, you will still be able to make ATM withdrawals and debit card purchases when you have enough funds at the time you attempt your transaction, and you will not incur an overdraft fee regardless of whether you have the funds to cover the transaction in your account when the transaction later settles.

Since opted-in consumers allow their bank or credit union to charge them fees in the event of an ATM or debit card overdraft, they generally pay more in overdraft fees than consumers who do not opt in. For example, in 2014 the CFPB reported that opted-in accounts are three times as likely to have more than 10 overdrafts per year as accounts that are not opted in. The CFPB also found that opted-in accounts have seven times as many overdraft fees as accounts that are not opted in. Take a closer look at how consumers are impacted by opting in to checking account overdraft.

Whether or not you opt in, you may still be charged fees for overdrafts on checks or ACH transactions. Still, deciding whether or not to opt in can be one of the most important decisions you make that affects the cost of your checking account.

Here are six steps you can take to reduce or eliminate overdraft fees:

  • Track your balance as carefully as you can to reduce the chance you’ll overdraft. Also, sign up for low balance alerts to let you know when you’re at risk of overdrawing your account. If you have regular electronic transfers, such as rent, mortgage payments or utility bills, make sure you know how much they will be and on what day they occur. Track the checks that you write and note when the funds are deducted from your account, so that you do not accidentally spend money you have already paid from your account. You also need to know when the funds you have deposited become available for your use.
  • Check your account balance before making a debit card purchase (or ATM withdrawal), and then pause to ask yourself if you any other payments coming up. Just because your account has enough funds when you’re at the checkout counter doesn’t mean you’ll have the funds later when the transaction finally settles. If you’ve recently written checks or made online bill payments that have yet to be deducted from your account, these could draw down your funds in the meantime, leaving you without enough funds to cover your purchase. Debit card overdraft fees can occur on transactions that were first authorized when there were sufficient funds to cover them, but took the account negative when the transaction settled.
  • Don’t opt-in. You can avoid paying overdraft fees when using your debit card for purchases and at ATMs by not opting-in, or by opting-out if you are currently opted in.  This means that your debit or ATM card may be declined if you don’t have enough money in your account to cover a purchase or ATM withdrawal at the time you attempt a transaction. However, it also means you won’t be charged an overdraft fee for these transactions.
  • Link your checking account to a savings account. If you overdraw your checking account, your institution will take money from your linked savings account to cover the difference. You may be charged a transfer fee when this happens, but it’s usually much lower than the fee for an overdraft.
  • Ask your financial institution if you are eligible for a line of credit or linked credit card to cover overdrafts. You may have to pay a fee when the credit line is tapped, and you will owe interest on the amount you borrowed, but this is usually a much cheaper way to cover a brief cash shortfall.
  • Shop around for a different account. Find out about your bank or credit union’s list of account fees, or ask about them, then compare them with account fees at other banks or credit unions. Assess your own habits and what fees you may face. Consider penalty fees, such as overdraft and non-sufficient funds charges, as well as monthly maintenance, ATM surcharge, and other service fees. When comparing banks or credit unions, you might also want to consider factors such as the hours of operation, locations, access to public transportation, available products and services, and reputation for customer service.

Questions about overdraft fees or checking accounts?

Check out Ask CFPB, our database of common financial questions and answers.

Submit a complaint

If you have a problem with overdraft fees or any other financial products, you can submit a complaint online or by calling (855)411-2372

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