What Is Overdraft Protection?

What Is Overdraft Protection?

Written by Corrina Murdoch
Fact-checked by Caitlin Wood
Last Updated February 10, 2022

Have you ever had a transaction get declined when making a purchase? This can happen when you make a transaction that brings your account balance below zero. Unfortunately, when this happens, you’ll be charged an NSF fee which can cost between $25 – $50 depending on the institution.  

That’s where overdraft protection comes in. With overdraft protection, you can complete your transaction when you need it and it gives you time to reconcile your account. To determine if you can benefit from adding overdraft protection to your bank account, it’s important to understand how it works.

How Does Overdraft Protection Work? 

Overdraft protection is an optional add-on for many bank accounts, though more premium versions may already include it. When the bank refers to overdraft protection, it’s against a transaction bouncing. Whether it’s a cheque, direct withdrawal, or debit, the bank compensates for the difference. Essentially it helps cover the cost of a transaction even if you don’t have any money in your account. 

For example, if you have $20 in your account, but make a $50 purchase, you’ll end up with an account balance of negative $30. Moreover, depending on the bank, you’ll be charged an overdraft fee and interest. 

The amount of overdraft protection you have depends on a range of factors, including your history with the bank and your personal banking needs. 

Types Of Overdraft Protection Services

There are different kinds of overdraft services. Some put your balance into a negative, where the bank processes your transaction, effectively lending you the money in the interim and adding a fee. Others take the difference from a separate account that you hold with the same bank. 

Overdraft Protection By Linking Accounts

With this method, you connect a line of credit, a credit card or another bank account to your bank account with overdraft protection. So when you have insufficient funds, your bank will cover the purchase through the linked account. However, the bank will usually charge a transactional fee and may also charge you for the amount of time that you are overdrawn. 

Regular Overdraft Protection

Basic overdraft protection involves your bank or financial institution covering the transaction themselves up to a certain limit. This service usually has a $5 fee which may be charged every month or by each overdraft transaction. Moreover, you’ll be charged interest on the amount overdrawn until you bring your account balance back to zero. Interest charges range between 19% – 22%.

Overdraft Protection Fees

Overdraft protection fees are charged by your bank when you use the overdraft service on your account. The specific cost varies by bank, though each institution usually charges per overdraft transaction or on a monthly basis. 

Interest is also charged on the amount overdrawn until you bring the balance back to zero. The longer your account stays in overdraft, the higher the cost. Some banks add a flat fee each day while others calculate a yearly interest on the overdrawn amount, similar to taking out a credit card with a bank.

BankOverdraft Protection Fee

Pros And Cons Of Overdraft Protection

As with any other financial product on the market, there are benefits and disadvantages to its use. The specific pros and cons of overdraft depend on the bank and your financial situation. Like any other form of credit, it requires prudent research before you get started. 


  • Good For Emergencies – Overdraft protection can add convenience when shopping and function as an emergency backup if you are temporarily short on funds. 
  • Flexible Way Of Borrowing – If you’re unable to qualify for a credit card because you have bad credit, are a student or are new to Canada, overdraft protection can be a way to borrow money without having to apply for credit. 
  • Avoid NSF Fees – A major benefit of overdraft, is that it avoids multiple NSF costs. For instance, if you have direct withdrawal from your bank for utility bills and your account does not have sufficient funds for the transaction, then it’s declined without overdraft. In this situation, you pay an NSF fee both to the bank and to the utility company. When you do have overdraft, you are only responsible for that one service fee. 


Overdraft protection isn’t a perfect financial product, especially if you’re worried about an inability to repay.

  • Fees – Depending on the agreement you have with the financial institution, you may be charged a monthly fee or a fee per overdraft transaction. 
  • Interest – The amount overdrawn will accrue interest over time, comparable to that of credit cards. If you pay the amount overdrawn promptly, it’s a great service. If it’s left unattended, the interest and fees together cause the debt to accrue at a faster rate. 
  • Impact On Credit – If you don’t restore your negative balance back to zero in a reasonable amount of time, the bank may close your account and forward the amount owing to a collections agency. This can negatively impact your credit
Lookout Should Banks Be Doing More To Help Low-Income Canadians?

Loans Canada Lookout


What’s The Difference Between An Overdraft Fee And An NSF Fee?

Though both expenses are a result of an account lacking sufficient funds to complete a transaction, there are distinct differences between overdraft and an insufficient funds fee (NSF). To understand whether overdraft is appropriate for your account, it’s important to know the difference between these two costs. 


A non-sufficient funds fee is a cost that you incur when you try to process a transaction without enough money in the account to pay for it. The NSF charge can come from the financial institution that couldn’t process the transaction. It can also come from the party trying to process a withdrawal, such as a lender or service provider. The NSF charged by these parties is usually significantly higher than an overdraft fee, ranging from approximately $25 to $50.

Overdraft Fee

An overdraft fee is the cost of service for overdraft transactions. When you make an overdraft transaction, you’ll be charged a fee plus applicable interest. Interest on the overdraft amount gets applied regularly and can compound. However, the charge is substantially smaller than an NSF fee. The most common charge is $5 for each time you use the overdraft. 

Keep your eyes peeled for other bank withdrawal fees.

How To Avoid Overdraft Fees?

Having overdraft protection on your bank accounts is a prudent way to manage your finances, but the ultimate goal is to avoid using it. There are several different approaches to avoiding overdraft, but the most significant is to create a budget and stick to it. By monitoring your finances routinely, you can avoid the hefty fees often associated with unattended overdrafts.

Pay Balance During Grace Period

The sooner you address the negative balance, the less you owe on the overdraft amount. This helps you avoid paying any interest on the amount you overdrew. Some banking institutions offer a one-day grace period. If you repay the amount during the same business day as you withdrew it, then they may overturn the fee. 

As previously mentioned, you can have your bank cover your overdraft transactions (when you don’t have enough funds) by drawing funds from your credit accounts or saving accounts. This option can help you avoid the interest associated with the service. 

Track Your Spending

The best way to avoid an overdraft fee is to manage your spending habits. If in doubt, use online banking to check the balance in your account before you make a large purchase. Establish a calendar for automated payments and withdrawals to identify any risk of going into a negative balance. By addressing these issues well ahead of time, you can prevent any need for overdraft as an emergency solution. 

Overdraft FAQs

Does overdraft affect your credit? 

In general, no, going into overdraft will not affect your credit. However, if you fail to bring your account back to zero within a reasonable amount of time then the bank may sell the amount owing to a debt collection agency. This may be reported to Equifax and/or TransUnion, which can negatively impact your credit. 

Can you go into overdraft if you have no money?

Yes, you can go into overdraft with no money. For instance, say you have overdraft protection through your account and it’s empty. If a withdrawal is processed through the account, the overdraft will cover the difference. The account holder now owes that amount to the bank, in addition to fees and interest that can accrue until you repay it. 

What happens if you don’t pay your overdraft? 

To prevent excess interest on your overdraft account, pay it as quickly as possible. If you don’t pay the amount in full, then the bank will continue to add fees and the interest builds. Eventually, the bank may close your account and move any unpaid balance to a collections agency. This negatively impacts your credit score. 

Bottom Line

Overdraft protection is one of many financial tools that allow you to have peace of mind when doing your day-to-day banking. While the ultimate goal is to avoid using it, in the event that you need it, overdraft can be a helpful service. Proper budgeting of your expenses is the first step towards financial health. Overdraft can be a helpful tool, similar to a line of credit, to help you prepare for emergencies. When used in conjunction with a well-structured financial strategy, overdraft can serve your household well. 

Corrina Murdoch has been a dedicated freelance writer and editor for several years. With an academic background in the sciences and a penchant for mathematics, she seeks to provide readers with accurate, reliable information on important topics. Working as a print journalist for several years, Corrina expanded her reach into the digital sphere to help more people gain insight into the realm of finances. When she's not writing, you can find Corrina swimming and spending time with family.

Click on the star to rate it!

How useful was this post?

Research & Compare

Canada's Loan Comparison Platform

Largest Lender Network In Canada

Save time and money with Loans Canada. Research and compare lenders before you apply. Share your experiences with Canada's top lenders.

Save With Loans Canada

Special Offers

Up to $1,500 Cash Back

Up to $1,500 Cash Back
Mortgage offer

Frank Mortgage is Canada’s one-stop shop for mortgages. Get up to $1,500 cash back on your mortgage.

View Offer
Improve Your Credit With Fidem

Improve Your Credit With Fidem

Great unsecured credit card for customers currently in, or recently discharged from, a consumer proposal or bankruptcy

View Offer
Earn 5% Cashback With Neo

Earn 5% Cashback With Neo
No annual fee!

Earn an average 5%¹ cashback at thousands of partners and at least 0.5%² cashback guaranteed with Neo.

View Offer
Build Credit For $10/Month

Build Credit For $10/Month

KOHO’s Credit Building Program helps you build a better credit history with easy to manage payments for just $10/month.

View Offer
Best Personal Loan Provider by Greedy Rates

Confidential & risk-free

All consultations and conversations with Loans Canada and its partners are confidential and risk-free. Speak with a trusted specialist today and see how we can help you achieve your financial goals faster. Loans Canada and its partners will never ask you for an upfront fee, deposit or insurance payments on a loan. Loans Canada is not a mortgage broker and does not arrange mortgage loans or any other type of financial service.

When you apply for a Loans Canada service, our website simply refers your request to qualified third party providers who can assist you with your search. Loans Canada may receive compensation from the offers shown on its website.

Only provide your information to trusted sources and be aware of online phishing scams and the risks associated with them, including identity theft and financial loss. Nothing on this website constitutes professional and/or financial advice.

Your data is protected and your connection is encrypted.

Loans Canada Services Are 100% Free. Disclaimer

Build Credit For Just $10/Month

With KOHO's prepaid card you can build a better credit score for just $10/month.