Getting overdraft protection
How overdraft protection works
An overdraft occurs when you don’t have enough money in your bank account to cover a payment or withdrawal.
Overdraft protection is a financial product that allows you to cover the amount of the transaction when you go into overdraft.
These transactions can include:
- debit purchases
- bill payments and pre-authorized debits
- cheques
- withdrawals
- transfers between bank accounts
Overdraft protection can help you avoid declined transactions, late payment charges and non-sufficient funds (NSF) fees. Each NSF fee can be around $50. Overdraft protection can be less expensive than some short-term credit options, such as payday loans.
Most financial institutions offer one or both of two 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 enough money to cover the transaction, up to an approved limit. Your bank account balance will show as a negative amount.
You pay interest on the overdrawn amount. You’ll also typically pay a flat monthly fee or a fee each time you go into overdraft, depending on which fee option you have chosen.
For example, say you have $200 in your bank account and you make a purchase that costs $250. This would overdraw your account by $50. Your account balance will be -$50. You will have to pay back the overdrawn amount of $50 along with your overdraft fee and any interest charges. Your financial institution will take the repayment out of your next deposit.
Linking your bank account to another financial product
By linking your bank account to another financial product, your financial institution will take money from your linked account to cover the overdraft.
Financial products you may be able to link include:
- lines of credit, including home equity lines of credit (HELOC)
- other bank accounts with money in them
- credit cards
Your financial institution may charge a fee each time it transfers money from another financial product.
Lines of credit including home equity lines of credit
You may be able to link your bank account to your line of credit or HELOC.
Your financial institution will cover the amount of the transaction when you don’t have enough money in your bank account by transferring money from your line of credit or HELOC.
You pay interest at your line of credit’s interest rate on the balance owing until you repay it.
Other bank accounts
You may be able to link your bank account to another bank account within the same financial institution. Your financial institution will then cover the amount of the transaction by transferring money from the bank account with funds in it.
If your linked bank account doesn’t have enough money, the financial institution may deny the transaction or charge you an NSF fee.
Credit cards
You may be able to link your bank account to a credit card. Your financial institution will then cover banking 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.
Costs of overdraft protection
Along with interest charges that apply to the overdraft amount, your financial institution can charge you a fee for overdraft protection.
Fees
Many financial institutions offer one or both of these fee options for basic overdraft protection:
- monthly fee
- pay-per-use fee
If your financial institution offers more than one fee option, you choose an option when you open your account or when you apply for overdraft protection. If you already have overdraft protection, you can change your fee option.
Monthly fee
You’re charged a flat fee every month no matter how many times you go into overdraft.
Monthly fees range from $2.50 to $5.
Most financial institutions require you to pay the fee every month, even if you don’t go into overdraft.
Some financial institutions will waive the fee during months when you don’t go into overdraft. This lowers the cost of overdraft protection, especially if you don’t go into overdraft often.
If you pay a monthly fee, you won’t be charged pay-per-use fees.
Example of basic overdraft protection with a monthly fee
Say you have $200 in a bank account. You have overdraft protection with a monthly fee of $5.
You make the following transactions:
| Date | Transaction or fee | Amount | Account balance |
|---|---|---|---|
| May 8 | ATM withdrawal | $250 | $-50 |
| May 10 | Debit purchase at grocery store | $25 | $-75 |
| May 18 | Pre-authorized debit for insurance | $50 | $-125 |
| May 31 | Monthly overdraft protection fee | $5 | $-130 |
Even though you went into overdraft three times during the month, your overdraft fee cost is capped at $5 because you pay a monthly fee.
Pay-per-use fee
You’re charged a set fee each time you go into overdraft. The maximum fee amount is $5.
If your account is already overdrawn, you’re usually charged a pay-per-use fee every time you make another banking transaction and increase your overdraft balance.
If you often go into overdraft, it can be expensive to use pay-per-use overdraft protection.
Some financial institutions will only charge a pay-per-use fee one time each business day, even if you go into overdraft more than once that day. This lowers your overdraft protection costs.
If you pay pay-per-use fees, you won’t pay a flat monthly fee.
Example of basic overdraft protection with pay-per-use fees
Say you have $200 in your bank account. You have overdraft protection with pay-per-use fees of $5.
You make the following transactions:
| Date | Transaction or fee | Amount | Account balance |
|---|---|---|---|
| May 8 | ATM withdrawal | $250 | $-50 |
| May 8 | Pay-per-use overdraft protection fee | $5 | $-55 |
| May 10 | Debit purchase at 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 |
Since you went into overdraft three times during the month, you’ll pay a total of $15 in pay-per-use fees.
Reasons you may not be charged overdraft protection fees
Some financial institutions may not charge you overdraft protection fees if you:
- have a bank account that includes overdraft protection at no additional cost
- go into overdraft by a small amount, such as $5 or less
- pay back the overdrawn amount before the end of the day
Courtesy fees
If you don’t have overdraft protection and can’t cover a transaction, some financial institutions might allow the transaction to go through and charge you a small fee for the overdraft. Financial institutions sometimes call this an overdraft courtesy fee, ad-hoc fee or casual overdraft fee. It can help you avoid a more expensive NSF fee.
Your financial institution may only charge this fee the first time you can’t cover a transaction. You may have to pay an NSF fee if you go into overdraft a second time and don’t have overdraft protection.
If you’re charged an overdraft courtesy fee, consider if overdraft protection would be worthwhile.
Interest charges
When your bank account is overdrawn, you pay interest each calendar day on the amount you owe. The annual interest rate for overdraft protection is usually between 19-22%.
For example, if your account is overdrawn by $75 for 5 calendar days at an annual interest rate of 22%, you’ll be charged $0.23 in interest.
This is calculated as follows: your overdraft balance owing ($75) x annual interest rate (22% or 0.22) ÷ number of days in a year (365) x number of days you’ve been in overdraft (5) = $0.23.
Remember that interest charges are only part of the cost of using overdraft. Pay-per-use fees can significantly increase your total banking costs.
Making payments on overdraft balances
With basic overdraft protection, your overdraft balance is automatically reduced every time you deposit money in your bank account.
For example, say your bank account has a balance of $-50 and you deposit $250. The $50 you owe on your overdraft balance will be paid off and your new account balance will be $200 before any overdraft fees and interest charges.
Financial institutions may require you to pay off your entire overdrawn balance after a certain time period.
If your overdraft protection plan lets you borrow money using a credit card, line of credit or home equity line of credit, you’ll need to pay it back according to the terms and conditions of your agreement.
Check your bank account agreement or ask your financial institution about your repayment terms.
Overdraft protection limits
Limits for basic overdraft protection can vary.
You may wish to ask for an overdraft limit that’s less than the amount of your regular paycheque after taxes and deductions. This will ensure that you’ll be able to pay off any overdraft balance on a regular basis.
Your financial institution can also decide to change your overdraft limit. It may do so without first letting you know.
Qualifying for overdraft protection
Basic overdraft protection is credit. Your financial institution will require you to fill out an application if you want to have overdraft protection for your bank account.
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, Yukon, Northwest Territories and Nunavut
When a financial institution decides if you qualify for overdraft protection, it will usually consider:
- your income and whether you have money that’s regularly deposited in your bank account
- your debts, loans and other regular payments you make
- your credit history and any negative information on your credit report such as missed payments
- how long you’ve been a customer
Understanding your overdraft protection agreement
Financial institutions require your consent to add overdraft protection to your bank account.
Many financial institutions reserve the right to decide if they will allow a transaction to be completed when you go into overdraft.
Many financial institutions also reserve the right to cancel your overdraft protection without notice if you don’t follow the terms of your bank account agreement. 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 bank account agreement carefully.
Ask your financial institution about anything you don’t understand.
Using overdraft protection
Using overdraft protection as a short-term solution
Overdraft protection isn’t meant to be an ongoing option to manage any money shortfall. It’s designed 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.
Overdraft protection and your credit score
Your bank account may default if you don’t repay your overdraft balance by the deadline in your agreement. This could hurt your credit score.
Ask your financial institution about the time period to repay your overdraft balance so you can be sure to pay it back on time.
Learn more about credit scores.
Overdraft protection and joint accounts
Joint accounts are deposit accounts where you share access and responsibility for all transactions with others. If the account has overdraft protection, all account holders are responsible for repaying debts.
Learn more about joint bank accounts.
Cancelling your overdraft protection
Financial institutions can usually cancel your overdraft protection within 10 days after you provide written notice. Some financial institutions allow you to cancel by phone. When you cancel your overdraft protection, you still need to pay any overdraft balance that you owe.
For more details on how to cancel, check the terms and conditions of your overdraft protection agreement or ask your financial institution.
How to choose the right overdraft protection for your needs
If you don’t have overdraft protection, you might be paying a lot for NSF fees and other service fees.
There are steps you can take to avoid having to pay overdraft protection and other banking fees or pay less in fees if you do need overdraft protection.
Check if you have overdraft protection
First, make sure you know if your bank account includes overdraft protection or not. Check the terms and conditions of your bank account agreement or check with your financial institution.
Keep track of your account balance
Keep an eye on your bank account balance by checking it often.
It’s important to know when money will be deposited to your account and when money will be taken out for bills and other payments.
Consider how often you make banking transactions such as:
- debit transactions in a store
- online purchases with your debit card
- e-transfers
- recurring bills you pay with a pre-authorized debit such as utilities, a mobile phone plan, a gym membership, a car loan, rent or mortgage payments
- ATM or branch withdrawals
- cheques
- transfers between bank accounts
It's important for you to stay informed about your account balance, especially if you have pay-per-use overdraft protection or don’t have overdraft protection.
Review your overdraft transactions
Review your banking transactions from the past few months to a year. Check how many times you went into overdraft and what you paid in banking fees. This will help you figure out your overdraft protection needs.
If you only go into overdraft a few times a year, consider overdraft protection with pay-per-use fees or a monthly overdraft service that doesn’t charge a fee unless you go into overdraft. This way, you won’t be paying for a service you’re not using.
If you often go into overdraft, consider a monthly overdraft service or a premium bank account that includes overdraft protection.
Depending on which features are included, a premium account may be more expensive than basic bank accounts, but the higher monthly fee may be worthwhile depending on your situation.
Find the best bank account for your needs with the Account Comparison Tool.
Get electronic alerts from your financial institution
Your financial institution may send you an electronic alert when the balance of your chequing or savings account falls below a certain amount.
These alerts may help you manage your day-to-day finances and avoid fees.
Learn more about these electronic alerts.
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