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Overdraft coverage vs. overdraft protection: What's the difference?

If you have bills, debit card purchases, and recurring payments regularly coming out of your checking account, you may occasionally — though accidentally — incur overdrafts.

Overdrafts happen when you make a purchase but don’t have enough money in your account to cover it. Not only is this inconvenient, but it's also expensive: The typical overdraft fee is $35, according to the FDIC.

There are two similar checking account features that can help you out in such situations: overdraft coverage and overdraft protection. While these features sound like they could mean the same thing, the difference between them is important. Understanding how they work can help you decide how you want to handle overdrafts and how much it might cost you.

Overdraft coverage is a checking account feature in which your bank or credit union covers overdrafts up to a certain amount.

For example, say your checking account has an available balance of $100, but you attempt to make a purchase of $120. If you’re enrolled in overdraft coverage, your bank would approve the transaction and float you $20 to cover the overdraft rather than simply declining the transaction.

This service may only apply to certain transaction types, such as debit card purchases and ATM transactions. But it may not apply to others, such as ACH transfers and checks. To find out what your bank’s overdraft coverage includes, check your account agreement or contact customer service.

Overdraft coverage may incur a fee, which may or may not apply based on the transaction amount. For example, U.S. Bank charges $36 for any overdraft items over $5 or when your negative balance is more than $50. Fee structures vary by institution.

Overdraft coverage is optional, and you have to enroll if you want to access it. Keep in mind that you may need to have had an active account for a certain amount of time or meet other eligibility criteria before you can enroll in this service.

Overdraft protection, like overdraft coverage, helps you avoid a negative account balance and overdraft fees. But unlike overdraft coverage — where your bank covers the difference — you cover the overdraft with money from a linked account.

For example, say you enroll in overdraft protection and link your savings account to your checking account. Your checking account balance is $100, and your savings account balance is $1,000. With overdraft protection, you attempt to make a $120 purchase with your debit card. Instead of declining the transaction, you’d be able to make the purchase, and your bank would transfer $20 from your savings account into your checking account to cover the difference.

Depending on your bank, you can link a variety of accounts to your checking account for overdraft protection. These may include other checking accounts, savings accounts, money market accounts, credit cards, and lines of credit. Some banks may even allow you to link multiple accounts for overdraft protection.

Some banks charge a fee for transferring money from your linked account into your checking account to cover an overdraft. For example, Fifth Third Bank charges $12 when you use overdraft protection for amounts over $5. However, Wells Fargo doesn’t charge any transfer fee — but using a line of credit for overdraft protection could lead to additional fees or interest.

If there isn’t enough money in your linked account(s) to cover the transaction, overdraft coverage may apply, in which the bank covers the transaction and may charge you a fee.

Like overdraft coverage, you need to enroll in overdraft protection if you want access to this feature.

While overdraft coverage and overdraft protection both help you avoid overdrafts, they differ in several ways, including:

Who covers the transaction: With overdraft coverage, your bank covers overdrafts. With overdraft protection, you cover them with a linked account (though overdraft coverage may kick in if the transaction exceeds the linked account’s balance).
Fees: Overdraft coverage fees average around $35. Overdraft protection might incur fees as well, but they are often lower. For example, at U.S. Bank, overdraft coverage costs $36 per item, but overdraft protection transfers cost $12.50.
Limits: Because your bank spots you when you enroll in overdraft coverage, this feature often comes with monetary limits. For example, SoFi limits overdraft coverage to $50. Overdraft protection may not have these same limits.
Eligibility: You may have to meet eligibility requirements to enroll in overdraft coverage. Meanwhile, it may be easier to qualify for overdraft protection because you, not the bank, cover the overdrafts.

If your bank offers both overdraft coverage and overdraft protection, it’s worth checking the fees for each. Typically, overdraft coverage comes with higher fees because the bank covers overdrafts for you. With overdraft protection, your own money covers the difference — but using a line of credit to cover overdrafts can lead to steep interest charges. Of course, you can choose not to enroll in either option.

No, overdraft protection and overdraft fees aren’t the same. Overdraft protection is a feature that lets you avoid overdraft fees by covering checking account overdrafts with money from a linked account.

Enrolling in overdraft protection can help you prevent declined transactions. If you’re prone to spending more than you have in your checking account, you may find overdraft protection a worthwhile feature. On the other hand, if you keep a close eye on your checking account balance and use bank alerts to monitor your account, you may not need to rely on overdraft protection.

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