Overdraft Protection

Overdraft Protection

The payment by a bank of a purchase by a client when that client's transaction results in an overdraft (which occurs when the account balance goes below zero). This allows the client to purchase whatever good or service led to the overdraft. The bank may assess a hefty fee for overdraft protection.

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Overdraft protection. Overdraft protection is a bank line of credit. It's activated if you have insufficient funds to cover a check written against your account, up to a predetermined limit.

As with other forms of credit, you are charged interest once the line of credit is activated. If you qualify for it, overdraft protection can help you avoid the fees, inconvenience, and embarrassment of accidentally bouncing a check.

However, because banks often charge relatively high interest rates for the service, it's best to repay the transferred amounts quickly. And some banks charge a monthly fee for having overdraft protection linked to your account, even if you don't use it. Others may not offer the protection on low-cost accounts.