What Does Overdraft Protection Mean for Your Credit?
What is Overdraft Protection?
Overdraft protection is a feature offered by banks to keep your checking account from overdrafting and incurring an overdraft fee. An overdraft occurs when you write a check or swipe your debit card but don't have enough money in your checking account to completely fund the transaction. 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.
Without overdraft protection, any transaction exceeding the amount in your checking account would be declined. Your bank would charge you a nonsufficient funds fee and the merchant to whom you presented payment would also charge a fee in addition to the original amount of the transaction.
To use a credit card or line of credit for overdraft protection, your credit history must be good enough to qualify for the credit product. You'll typically need to have a checking account and credit product with the same bank. The exact qualification criteria will vary by bank.
Credit Card and Line of Credit Overdraft Protection
Your credit could be impacted when your overdraft protection is linked to a credit card or line of credit. Some credit card issuers treat these overdraft payments as a cash advance. This makes the overdraft protection more expensive 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.
Impact To Your Credit
The overdraft protection is meant to protect you from the problems that stem from not having enough money in your checking account. However, if you can't afford to clear up the overdraft, you could suffer worse consequences. For example, if your account overdrafts to your credit card and you later miss your credit card payment or default on the credit card, your credit score will be damaged.
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.