Getting overdraft protection
Learn more about overdraft protection. Overdraft protection may cover a transaction when you don’t have enough money in your account. Learn how overdraft protection works, what it may cost and how to choose an option that fits your needs.
Understanding overdraft protection
An overdraft happens when you don’t have enough money in your bank account to cover a payment or withdrawal.
This means your account balance goes below $0 and you have a negative balance.
Overdraft protection is a financial product that may cover the transaction if your account is in overdraft.
It may cover transactions like:
- debit purchases
- bill payments and pre-authorized debits
- cheques
- ATM or branch withdrawals
- transfers between bank accounts
Overdraft protection may help you avoid declined transactions, late payment charges and non-sufficient funds (NSF) fees.
Learn more about non-sufficient funds fees.
Tip
Overdraft protection may cost less than some high-cost short-term credit options like payday loans.
Understanding the types of overdraft protection
Most financial institutions offer 1 or 2 main types of overdraft protection:
- basic overdraft protection
- linking your bank account to another financial product
Basic overdraft protection
With basic overdraft protection, your financial institution lends you money to cover the transaction up to an approved limit. Your account balance will show as a negative amount. A negative amount (for example, minus $50 or -$50) means you owe money.
Example
Suppose you have $200 in your account.
You make a $250 purchase. Your account goes $50 into overdraft, and your balance drops to –$50.
You'll need to pay back the $50, plus any overdraft fees and interest.
Your financial institution will take the amount owed from your next deposit.
You pay interest on the overdrawn amount. You also usually pay a flat monthly fee or a fee each time you go into overdraft. It depends on your fee option.
Overdraft limits may vary for basic overdraft protection. Your overdraft limit is the most you can borrow when your account goes below $0. You may request an overdraft limit that suits your needs and you can easily pay off. For example, a limit that is less than your regular paycheck. This may help make it easier to pay back any overdraft balance.
Your overdraft limit isn’t fixed. Your financial institution may change it. Depending on your agreement, it may lower your limit without notice.
Increasing an overdraft limit usually requires your express consent. Rules can vary by financial institution.
Linked financial products
Your financial institution may link your account to other financial products.
Other financial products may include:
- lines of credit
- home equity lines of credit (HELOC)
- credit cards
- other accounts with money in them
In this case, they may take money from the linked product to cover an overdraft.
Your financial institution may charge a fee each time it transfers money from another financial product.
Lines of credit or HELOCs
Your financial institution will cover your transaction amount by transferring money from your line of credit or HELOC. You pay interest on the balance owing at your line of credit’s interest rate until you repay it.
Credit cards
Your financial institution will cover transactions by taking a cash advance from your linked credit card.
The interest rate for cash advances is usually higher than the regular interest rate for a credit card. Interest charges apply right away for a cash advance on a credit card.
Other bank accounts
Your financial institution will cover the amount of the transaction by transferring money from the account that has funds.
If your linked account doesn’t have enough money, the financial institution may:
- deny the transaction, or
- charge you an NSF fee
Comparing overdraft protection costs and fees
Overdraft protection may cost fees and interest. Your financial institution may charge a fee for overdraft protection. You also pay interest on the overdraft amount.
Understanding fee options
For basic overdraft protection, many financial institutions offer 1 or 2 fee options:
- monthly fee
- pay-per-use fee
You choose an option when you open your account or when you apply for overdraft protection. If you already have overdraft protection, you may change your fee option.
Some financial institutions may not charge you overdraft protection fees if you:
- have an account that includes overdraft protection at no extra cost
- go into overdraft by a small amount, like $5 or less
- pay back the overdrawn amount before the end of the day
Monthly fees
A monthly fee is a flat fee that your financial institution may charge each month for overdraft protection.
You pay the same monthly fee even if you go into overdraft more than once. Monthly fees are usually about $5. If you pay a monthly fee, your financial institution won’t charge pay-per-use fees.
Most financial institutions charge this fee every month, even if you don’t go into overdraft. Some will waive the fee in the months when you don’t go into overdraft. This may lower the cost of overdraft protection, especially if you don’t go into overdraft often.
For example, suppose you have $200 in your bank account. You have overdraft protection with a monthly fee of $5. You make the following transactions.
| Date | Transaction or fee | Amount | Account balance after |
|---|---|---|---|
May 8 |
ATM withdrawal |
$250 |
-$50 |
May 10 |
Debit purchase at a grocery store |
$25 |
-$75 |
May 18 |
Pre-authorized debit for insurance |
$50 |
-$125 |
May 31 |
Monthly overdraft protection fee |
$5 |
-$130 |
In this example, your account went into overdraft with the first transaction. Each additional transaction added to the overdraft balance. You were charged only one $5 fee for the month. Your total overdraft protection fee for the month is $5.
Pay-per-use fees
A pay-per-use fee is a set fee your financial institution charges each time you go into overdraft. The maximum fee is generally $5.
Once your account is in overdraft, your financial institution usually charges a pay-per-use fee for transactions that increase the overdraft.
Frequent overdrafts can add up. If you often go into overdraft, pay per use overdraft protection can be costly.
Some financial institutions charge a pay-per-use fee only once each business day, even if additional transactions increase your overdraft balance that day. This may lower your overdraft protection cost.
If you opt for pay-per-use fees, you won’t pay a flat monthly fee.
For example, suppose you have $200 in your bank account. Your overdraft protection with pay-per-use fees is $5. You make the following transactions.
| Date | Transaction or fee | Amount | Account balance after |
|---|---|---|---|
| May 8 | ATM withdrawal | $250 | -$50 |
| May 8 | Pay-per-use overdraft protection fee | $5 | -$55 |
| May 10 | Debit purchase at a grocery store | $25 | -$80 |
| May 10 | Pay-per-use overdraft protection fee | $5 | -$85 |
| May 18 | Pre-authorized debit for insurance | $50 | -$135 |
| May 18 | Pay-per-use overdraft protection fee | $5 | -$140 |
In this example, your account was already in overdraft. Each additional transaction triggered a fee and added to the overdraft amount. You’ll pay a total of $15 in pay-per-use fees.
Understanding courtesy fees
A courtesy fee is a small fee some financial institutions may charge when they let a transaction go through.
This may happen when you don’t have overdraft protection and you don’t have enough money to cover a transaction.
Financial institutions may call this an overdraft courtesy fee, an ad-hoc fee or a casual overdraft fee. This might help you avoid a more expensive NSF fee.
Your financial institution may charge this fee only the first time you can’t cover a transaction. If it happens again and you still don’t have overdraft protection, you may be charged an NSF fee.
If your financial institution charges you a courtesy fee, decide if overdraft protection is a better option.
Understanding interest charges
If your bank account is in overdraft, you pay interest each calendar day on the amount you owe. An interest rate is the percentage your financial institution will charge you for lending you money. The annual interest rate for overdraft protection is typically around 21% or 22%.
Tip
Interest is only part of the cost of overdraft. Pay-per-use fees can significantly increase your total banking costs.
Qualifying for overdraft protection
Basic overdraft protection is a type of credit. It means your financial institution may lend you money if you don’t have enough in your account. You need to apply for overdraft protection if you want it.
To qualify for overdraft protection, you must be the age of majority:
- 18 years old: Alberta, Saskatchewan, Manitoba, Ontario, Quebec and Prince Edward Island
- 19 years old: British Columbia, New Brunswick, Nova Scotia, Newfoundland and Labrador, Yukon, Northwest Territories and Nunavut
To find out if you qualify for overdraft protection, a financial institution will usually consider:
- your income
- if you have money that’s regularly deposited in your account
- your debts and loans
- other regular payments you make
- your credit history
- any negative information on your credit report, like missed payments
- how long you’ve been a customer
Understanding your overdraft protection agreement
Financial institutions must get your express consent to add overdraft protection to your account.
Many financial institutions reserve the right to refuse a transaction to go through if you go into overdraft. Many also reserve the right to cancel your overdraft protection without notice. For example, if you don’t pay off your overdraft balance by the deadline in your agreement.
Each financial institution’s overdraft protection may have different terms and conditions. Review the terms and conditions in your account agreement carefully.
Ask your financial institution about anything you don’t understand.
Learn more about express consent for financial products and services.
Choosing the right overdraft protection for your needs
If you don’t have overdraft protection, you might be paying NSF fees and other service fees. You may take steps to avoid paying certain fees.
Check if you already have overdraft protection
Your account may already include overdraft protection. Check the terms and conditions of your account agreement or check with your financial institution.
Keep track of your account balance
Check your account balance often. Know when money goes into and comes out of your account for bills and other payments.
Look at your balance closely, especially if you have pay-per-use overdraft protection or don’t have overdraft protection.
Review your overdraft transactions
Review your transactions from the past few months to a year. Check how many times you went into overdraft and what you paid in banking fees.
Choose an option based on how often you go into overdraft
If you only go into overdraft a few times a year, consider:
- overdraft protection with pay-per-use fees
- a monthly overdraft service with no fee unless you go into overdraft
If you often go into overdraft, consider:
- a monthly overdraft service
- a premium bank account that includes overdraft protection
Tip
Premium accounts usually cost more than basic bank accounts. The higher monthly fee may be worth it, depending on your needs and circumstances.
Use the Account Comparison Tool to compare features for different chequing and savings accounts.
Set up electronic alerts
Your financial institution may send you an electronic alert when your account balance falls below a set amount.
These alerts may help you manage your day-to-day finances and avoid fees. Check them as soon as you get them.
Paying back your overdraft balance
If you choose basic overdraft protection, your overdraft balance goes down each time you deposit money into your account.
For example, if your account balance is -$50 and you deposit $250, you pay back the $50 overdraft amount. Your new account balance will be $200 before any overdraft fees and interest charges.
Financial institutions may require you to pay off your entire overdraft balance after a certain time.
Your overdraft protection plan may let you borrow money using a:
- credit card
- line of credit
- HELOC
In that case, you’ll need to pay it back according to the terms and conditions of your agreement.
Check your account agreement or ask your financial institution about your repayment terms.
Using overdraft protection responsibly
Overdraft protection isn’t meant to be an ongoing option to manage a money shortfall. It’s meant to be a short-term solution to help you cover a necessary expense.
For long-term solutions, consider using a credit product such as a line of credit or a personal loan.
Protecting your credit score
Your account may be in default if you don’t repay your overdraft balance by the deadline in your agreement. This might hurt your credit score.
Ask your financial institution how much time you have to repay your overdraft balance. This helps you pay it back on time.
Learn more about credit reports and scores.
Understanding joint accounts
Joint accounts are deposit accounts where you share access and responsibility for all transactions with others. If the account goes into overdraft, all account holders are responsible for repaying the amount owed.
Learn more about joint accounts.
Cancelling your overdraft protection
You usually need to give your financial institution written notice to cancel your overdraft protection. Some financial institutions allow you to cancel by phone.
Cancelling your overdraft protection doesn’t cancel what you owe. You’ll still need to repay any overdraft balance on your account.
For details on how to cancel, check the terms and conditions of your overdraft protection agreement.
You may also ask your financial institution.