Overdraft protection vs. overdraft safety​: What is the distinction?

You probably have payments, debit card purchases, and recurring funds repeatedly popping out of your checking account, chances are you’ll often — although unintentionally — incur overdrafts.

Overdrafts occur while you make a purchase order however don’t manage to pay for in your account to cowl it. Not solely is that this inconvenient, but it surely’s additionally costly: The standard overdraft price is $35, in line with the FDIC.

There are two comparable checking account options that may enable you to out in such conditions: overdraft protection and overdraft safety. Whereas these options sound like they might imply the identical factor, the distinction between them is vital. Understanding how they work may also help you determine the way you wish to deal with overdrafts and the way a lot it may cost you.

Overdraft protection is a checking account characteristic during which your financial institution or credit score union covers overdrafts as much as a specific amount.

For instance, say your checking account has an accessible stability of $100, however you try to make a purchase order of $120. In case you’re enrolled in overdraft protection, your financial institution would approve the transaction and float you $20 to cowl the overdraft quite than merely declining the transaction.

This service might solely apply to sure transaction varieties, similar to debit card purchases and ATM transactions. However it could not apply to others, similar to ACH transfers and checks. To search out out what your financial institution’s overdraft protection consists of, test your account settlement or contact customer support.

Overdraft protection might incur a price, which can or might not apply primarily based on the transaction quantity. For instance, U.S. Financial institution fees $36 for any overdraft gadgets over $5 or when your adverse stability is greater than $50. Charge constructions differ by establishment.

Overdraft protection is optionally available, and it’s a must to enroll if you wish to entry it. Remember the fact that chances are you’ll have to have had an energetic account for a sure period of time or meet different eligibility standards earlier than you possibly can enroll on this service.

Learn extra: How a lot can I overdraft my checking account?

Overdraft safety, like overdraft protection, helps you keep away from a adverse account stability and overdraft charges. However in contrast to overdraft protection — the place your financial institution covers the distinction — you cowl the overdraft with cash from a linked account.

For instance, say you enroll in overdraft safety and hyperlink your financial savings account to your checking account. Your checking account stability is $100, and your financial savings account stability is $1,000. With overdraft safety, you try to make a $120 buy together with your debit card. As a substitute of declining the transaction, you’d be capable to make the acquisition, and your financial institution would switch $20 out of your financial savings account into your checking account to cowl the distinction.

Relying in your financial institution, you possibly can hyperlink quite a lot of accounts to your checking account for overdraft safety. These might embody different checking accounts, financial savings accounts, cash market accounts, bank cards, and contours of credit score. Some banks might even can help you hyperlink a number of accounts for overdraft safety.

Some banks cost a price for transferring cash out of your linked account into your checking account to cowl an overdraft. For instance, Fifth Third Financial institution fees $12 while you use overdraft safety for quantities over $5. Nonetheless, Wells Fargo doesn’t cost any switch price — however utilizing a line of credit score for overdraft safety may result in further charges or curiosity.

If there isn’t sufficient cash in your linked account(s) to cowl the transaction, overdraft protection might apply, during which the financial institution covers the transaction and will cost you a price.

Like overdraft protection, you could enroll in overdraft safety if you would like entry to this characteristic.

Whereas overdraft protection and overdraft safety each enable you to keep away from overdrafts, they differ in a number of methods, together with:

• Who covers the transaction: With overdraft protection, your financial institution covers overdrafts. With overdraft safety, you cowl them with a linked account (although overdraft protection might kick in if the transaction exceeds the linked account’s stability).

• Charges: Overdraft protection charges common round $35. Overdraft safety would possibly incur charges as nicely, however they’re usually decrease. For instance, at U.S. Financial institution, overdraft protection prices $36 per merchandise, however overdraft safety transfers price $12.50.

• Limits: As a result of your financial institution spots you while you enroll in overdraft protection, this characteristic usually comes with financial limits. For instance, SoFi limits overdraft protection to $50. Overdraft safety might not have these similar limits.

• Eligibility: You’ll have to satisfy eligibility necessities to enroll in overdraft protection. In the meantime, it could be simpler to qualify for overdraft safety since you, not the financial institution, cowl the overdrafts.

In case your financial institution presents each overdraft protection and overdraft safety, it’s value checking the charges for every. Usually, overdraft protection comes with larger charges as a result of the financial institution covers overdrafts for you. With overdraft safety, your individual cash covers the distinction — however utilizing a line of credit score to cowl overdrafts can result in steep curiosity fees. In fact, you possibly can select to not enroll in both possibility.

No, overdraft safety and overdraft charges aren’t the identical. Overdraft safety is a characteristic that allows you to keep away from overdraft charges by masking checking account overdrafts with cash from a linked account.

Enrolling in overdraft safety may also help you stop declined transactions. In case you’re susceptible to spending greater than you’ve got in your checking account, chances are you’ll discover overdraft safety a worthwhile characteristic. Then again, in the event you maintain a detailed eye in your checking account stability and use financial institution alerts to watch your account, chances are you’ll not have to depend on overdraft safety.