Overdrafting means taking more money out of your bank account than it has in it, or for credit cards, it means exceeding your credit limit. Most U.S. banks and credit card companies allow for such an overdraft, provided you have authorized them to do so. Banks charge overdraft fees for this service, but many people authorize this banking feature anyway because it allows them to keep making financial transactions even when they’ve exceeded their bank account balance or credit limit.
In This Article
- Overdraft Amount Limits
- Overdraft Fees
- Overdrafting with a Debit Card
- Overdrafting with a Credit Card
- Overdraft’s Affect on Your Credit Score
All About Overdrafts
You can overdraft at an ATM simply by overdrawing your balance. To avoid doing this, you can get overdraft protection, a banking service offered by nearly every financial institution that allows you to link all your bank accounts (e.g., your checking account and savings account). When one account balance is overdrawn, the overdraft protection kicks in, transferring money from another account balance to cover the shortfall. Banks charge overdraft protection fees, but those fees tend to be cheaper than overdraft ones. Overdraft protection covers overdrafts caused by ATM withdrawals, checks, and purchases.
Overdraft Amount Limits
There’s no universal limit on how much you can overdraft at an ATM. A bank’s overdraft limit depends on a variety of factors and often varies from one customer to the next.
An ATM owned by your bank (or one affiliated with your bank) will let you overdraft, if your account has the option to overdraft. New account holders and account holders with low credit scores are usually granted a courtesy overdraft limit between $100 and $300, while customers in excellent standing can often overdraft $1,000 or more. You can ask your financial institution about your overdraft limit, but many of them won’t officially let you know what it is.
If you’re at another bank’s ATM, you’ll be subject to that bank’s non-customer overdraft limit. Financial institutions that allow non-customers to overdraft at their ATMs usually limit the permitted overdraw amount. Some banks are quite courteous when it comes to overdrafts. For example, Union Savings Bank ATMs will warn you if you are about to overdraw, giving you the option to cancel the transaction if necessary. In its Overdraft Service FAQ, Bank of America says its ATMs “may” give you the opportunity to agree to overdraft services for a withdrawal that exceeds your balance. Most banks will allow you to check your balance before making a withdrawal to avoid unwittingly overdrawing your account.
Banks’ overdraft fees can be astronomically high, so it’s important to educate yourself about your financial institution’s fee policies before making the choice to overdraw your account. Many banks have been criticized for imposing “record high” ATM overdraft fees, topping $30 per transaction in some cases. Further, your fees may increase at a progressive rate for each transaction.
In short, overdrafts can be costly. A 2013 CFBP report on overdraft practices found that the average overdraft fee in 2012 was $31.26. That fee reflected about a $10 increase between 1998 and 2012. With these fees in mind, it’s often best either to get overdraft protection or avoid overdrafts altogether.
Overdrafting with a Debit Card
As stated above, you can overdraft with a debit card simply by overdrawing your account. Your bank will set the limit on how much you can overdraw, if anything. As long as your under that overdraft limit, you’ll be able to withdraw funds as usual from the ATM.
If you see the term “overdrawn” appear on your bank statement, it means you must fund your account to return it to a positive number. Otherwise, you might incur penalty fees — or even collections — from your bank. Funding your account will prevent this from happening. Contact your financial institution.
Overdrafting with a Credit Card
Withdrawing cash on a credit card is expensive. Taking out cash with a credit card is considered a cash advance, and there are nearly always fees associated with these types of cash withdrawals, unless you have a special offer or special rate with your card.
The interest rates charged on cash withdrawals generally surpass rates associated with standard purchases. Credit cards generally charge around 20%, but for cash withdrawals, rates increase to about 25%. Technically, there are no overdraft fees with a credit card; however, it is possible to overdraw a credit card at an ATM by exceeding your credit limit, provided your credit card company allows you to do so.
You may need to contact your credit card company and request pre-authorization to overdraw your card. If you want to know more about getting cash from your credit card, you can also read our article, How to Get Cash from a Credit Card: 6 Ways to Do It.
Overdrafts’ Affect on Your Credit Score
Usually an overdraft won’t have any affect on your credit score. For a debit card, an overdraft will have no affect on your credit score unless you take too long to repay the overdraft and your account is sent to collections (generally after 30 days). Read more about how this can happen in our article, How Much Can I Overdraft My Checking Account.
Credit cards are a little trickier. Borrowing in any way, shape or form affects your credit score. So, if you withdraw cash on a credit card, it’s recorded on your credit score.
Most lenders assessing your credit score view cash withdrawals as a red flag because they assume you had to withdraw cash from your credit card due to financial problems. With that in mind, you should only use overdraw with a credit card as a last resort. If you need cash from your credit card, here are six ways to do it responsibly.
What to Know Before You Overdraft
- Use an ATM owned by your bank (where possible) to avoid being denied an overdraft at another financial institution.
- An overdraft on a debit card doesn’t affect your credit score as long as you pay it back in full before your account is sent to collections (usually 30 days).
- Credit cards don’t issue overdraft fees. Instead, they will likely charge a higher interest rate for a cash withdrawal. Call your credit card company to receive pre-authorization to withdraw an amount that exceeds your credit limit.
How to Avoid Overdrafting
- Know your account details. What is your authorized overdraft protection limit? What are the fees associated with overdraft? Can you enroll in courtesy overdraft protection?
- Carefully read your bank’s terms and conditions regarding overdraft.
- Track your spending and take receipts whenever you withdraw at ATMs.
- Consider using a low-interest credit card if you’re in a bind. It may be a more cost-effective alternative to overdrawing your account, especially if you can pay it off before it begins to accrue interest.
- According to the Consumer Financial Protection Bureau, you should either link your checking account with your savings account for overdraft protection or ask your bank to deny overdrafts on your account.
- Ask your bank if you can receive text or email notifications when your account falls below a certain amount.
- Look for checking accounts with low overdraft fees.
- Strategically organize your monthly payments to avoid overdrawing your account.
- If you have a payment due, ask the creditor to postpone the payment deadline to avoid overdrawing your account.
- Build a cash reserve so you always have extra funds available in your checking account for emergencies.
There are several ways to take advantage of ATM overdrafts or avoid them, depending on your financial needs. Understanding your options when it comes to overdrafts will allow you to make sure they don’t negatively impact your life.