You might be at the grocery store the day before your paycheck is deposited and accidentally buy too much without thinking. Suddenly you are facing the embarrassment of a declined card or overdraft fee, depending on whether you have overdraft protection.
Much like going over the credit limit on a credit card, it is entirely possible to overdraft a debit card. When you overdraft on your debit card, you pay an additional fee in order to complete purchases. Alternatively, you can run your debit card as a credit card, which will give you a couple of days before the transaction goes through to put money in your account.
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How Much Can You Overdraft Using a Debit Card?
Generally, you can overdraft up to the amount you have in the linked accounts. If you do not have sufficient funds in the linked accounts, however, it is at the sole discretion of the debit card lender whether to approve the transaction. Generally, this is determined by your debit card contract or the limit of the lender. They will essentially take the transaction on credit.
Debit Card Overdraft Fees
Banks use overdraft fees as one way to make a profit. A study from the Consumer Financial Protection Bureau found that the average overdraft fee was $34 per transaction in 2017. They also found that frequent overdrafters, who overdrew 10 or more times in a year, made up 9% of accounts but incurred 79% of overdraft fees. Opted-in frequent overdrafters typically had 18 overdraft fees per year, compared to five for those not opted in. The median opted-in fee total was $450 more than a frequent overdrafter not opted in.
A 2013 study they conducted found those who opted into overdraft coverage paid an average of $196 in fees in 2011, compared to $28 in fees for those not opted in.
Depending on the lender, there may be a maximum fee per day. For example, Chase debit cards, which charge $34 per overcharge, max out at three charges per day, or $102.
How to Avoid Overdrawing Your Debit Card
There are a few ways to prevent overdrawing funds on your debit card. First, you can prevent your account from allowing purchases to clear when your account has insufficient funds. Depending on the financial institution, this may be something you choose to opt in for.
Some lenders allow you to link one or more backup accounts to your debit card, and if the main account does not have enough money to pay for a transaction, the backup accounts will instead be used to cover the difference. This typically incurs a fee.
Similarly, you can have a line of credit backing your debit card. While you won’t pay any fees on the transaction, you will likely have to pay interest on the overdraft difference. There is also likely a credit limit. For example, Capital One offers an overdraft credit line with a maximum limit of $1,000.
If you know your account will not cover the purchase, an alternative method is to use your debit card as a credit card. Generally, this means the transaction will not go through for two or three days, giving you enough time to add money to your account. As a bonus, you will likely benefit from more security measures than the typical debit card purchase.
Finally, keeping tabs on your account can help. You can create a personal budget or simply try to live frugally. You can also set up your account to text or email you when your funds drop below a certain amount.
Overdrafting a Debit Card on Purpose
In a pinch, you can overdraft on purpose instead of taking out a small loan or getting denied a sale. If your choice is between paying the overdraft fee or getting a payday loan, the fee is almost always preferable.
People with poor credit or limited options for regular bank loans might find that the overdraft fees are worth it, even if they start adding up. Bank fees, such as overdraft fees, are part of the cycle of poverty. However, the predatory nature of payday loan interest rates is even worse and likely to perpetuate the cycle more than overdraft fees.
Debit cards can be overdrafted, but without opting into overdraft protection or having a backup line of credit, your transaction will simply be declined. While this can be embarrassing, you will incur no fees. However, overdraft protection also enables you to continue with your purchase in a pinch.
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