When your account balance falls below zero, overdraft protection or overdraft coverage may help cover outstanding transactions. Learn how they work and the key differences between the two.
- Overdraft protection transfers funds from a connected account, while overdraft coverage may cover certain transactions at the bank’s discretion with a potential fee.
- These services may help prevent declined transactions and missed payments, but may come with fees or risks of overspending.
- You typically must set up overdraft services, and terms vary by bank, so it’s important to understand your options.
People don't often overdraw their checking accounts on purpose, but it happens more often than you may think. Something as simple as a late deposit, transaction hold, or larger-than-expected debit could throw off your accounting. Overdraft protection and overdraft coverage are two services that banks typically offer to help customers in this situation.
Overdraft protection pulls funds from a connected account to cover the shortfall, while overdraft coverage allows certain transactions to process at the bank's discretion, even if you have insufficient funds in your checking account (typically for a fee). Understanding the difference may help you decide which option makes the most sense for you.
What does “available balance” mean?
The available balance is the amount of money in your checking account that is available for you to use at any given time. It can include the account balance plus pending credits, debits and holds. This balance may be updated throughout the day as activity takes place.
When determining how much you can spend without overdrawing your account, remember that your available balance is continuously changing. If your account shows an available balance of, say, $1,000 but you’ve scheduled a $200 bill payment for tomorrow, you should consider $800 your spending limit (minus any minimum balance requirement), unless you have also scheduled a deposit that will clear in time to cover that $200 payment.
Overdraft coverage vs. protection: understanding the difference
Overdraft coverage and overdraft protection are two different services offered by some banks. Here are the differences between the two.
What is overdraft coverage?
Overdraft coverage is a service your bank may offer where your everyday one-time debit card and ATM transactions may process even if you have insufficient funds in your checking account to cover the transactions. The bank covers the shortage until you repay it and may assess you an overdraft fee for doing so.
What is overdraft protection?
Overdraft protection is a service your bank may offer where you can connect one of your accounts, such as a savings or secondary checking account (the protecting account), to your primary account (the protected account). If there’s an insufficient balance in the protected account to pay for an item(s), available funds are automatically transferred from the protecting account to cover the purchase(s). It’s important to check with your bank, as a fee may be assessed for this service.
| Overdraft Coverage | Overdraft Protection | |
|---|---|---|
| How it works | Bank pays the transaction on your behalf. | Funds automatically transfer from a linked account. |
| What it covers | ATM one one-time debit card transactions | Any transactions that overdraw your account. |
| Linked account required | No | Yes |
| Fees charged | Yes, per transaction (varies by account) | Possible transfer fee. If connected to a credit card, cash advance fees may apply. |
| Opt-in required | Yes | Yes |
Pros and Cons of Overdraft Services
Overdraft services may be useful for avoiding declined and returned transactions. However, there are some trade-offs to consider before setting up overdraft services.
Benefits of overdraft services:
- Minimizes declined transactions: Payments and purchases are less likely to be declined when cash flow runs short.
- Acts as a buffer for timing gaps: If a small timing error causes the shortage, your finances stay on track with minimal disruption.
- Avoids failed payment penalties: Merchants and other payees often charge a bounced-check fee in addition to what the bank charges and may add other penalties, such as interest rate changes.
- Multiple options to fit your needs: Choose coverage, protection, or both.
Potential drawbacks of overdraft services:
- Fees may add up: Each overdrawn transaction may incur an additional fee, making it costly.
- May encourage overspending: Relying on overdraft services regularly may make it easier to spend beyond what your income might comfortably cover.
- Overdraft protection only works if the connected account has available funds: If both account balances are low, the transaction will likely fail.
Not every account charges you for an occasional overdraw. For example, PNC Simple Checking does not charge overdraft fees.
Consider Tools That Help You Act Earlier
Some banks offer features designed to help customers address low balances before overdraft services are needed. For example, PNC Bank’s Low Cash Mode® provides real-time balance updates and gives you additional time to bring an account balance back to $0 or higher before certain fees may apply. Tools like these may help you avoid needing overdraft coverage or protection altogether.
Am I automatically covered by overdraft coverage or overdraft protection?
No. Overdraft coverage and protection are discretionary services. In most instances, you must set it up to be covered by their protections. The fees and terms associated with these services can vary widely from bank to bank, so be sure you understand your bank’s fee structure and terms before you decide whether to enroll.
What type of accounts may I connect for overdraft protection?
This depends on your bank’s policies. Most allow you to connect your protected account to another deposit account — e.g., a savings or secondary checking account. Some also allow you to connect to a personal line of credit or a credit card. Be aware, however, that transfers from credit accounts may be considered cash advances, which may be subject to fees and potentially higher interest rates than regular credit purchases.
Am I allowed to connect more than one account?
Each bank has its own rules related to how many accounts may be connected. Commonly, customers may connect to one, two or three accounts.
Learn more about Overdraft Solutions at PNC.
