What is Overdraft Protection?
This Page's Content Was Last Updated: July 17, 2024
Navigating the finances of everyday life can be like walking a tightrope, a balance most of us try to maintain with varying degrees of success. In these uncertain times, having a financial cushion is not just a luxury but a necessity for some. One such safety net that Canadians can turn to is overdraft protection - but what exactly is overdraft protection, and how can it help steer you away from financial pitfalls? In this guide, we'll explore the concept of overdraft protection and the types of overdraft protection available in Canada.
- Overdraft protection helps prevent your payments from being denied and incurring expensive non-sufficient funds fees when you try to use more money than you have in your account.
- There are two main types of overdraft protection in Canada: a line of credit attached to your chequing account or linking a credit card or other account that can transfer funds to your chequing account.
- Overdraft protection provides flexibility in managing your funds, allowing you to make necessary payments even if your account balance is low.
- Most banks allow you to choose between paying a flat monthly fee or a per-use fee, with interest charged on your overdraft balance.
What is Overdraft Protection?
Overdraft protection allows you to overdraw your account up to a predetermined amount without facing the consequences of expensive non-sufficient funds fees or declined transactions. In other words, overdraft protection is essentially a financial cushion, or a safety net of sorts, for when unexpected expenses or errors lead to a cash flow shortfall in your account. While there’s a cost for overdraft protection, it can save you money compared to the fees that you might incur without overdraft protection.
How Does Overdraft Protection Work?
Overdraft protection works by setting a predetermined amount that you can overdraw from your account without facing any penalties. This amount is typically set by the bank based on your credit history, income, and other factors. It is important to note that overdraft protection is not automatically added to your account; you must opt-in for this service with your bank.
When a transaction or withdrawal exceeds the available balance in your account, overdraft protection kicks in, allowing the transaction to go through even though you don’t have enough money in your bank account. The transaction will be approved, and the resulting overdraft amount, including any associated fees, will be subject to interest charges. You will need to repay your overdraft balance within a specified period.
In Canada, overdrafts typically come with a predetermined credit limit, and the terms and conditions, including interest rates, are disclosed at the time the service is set up.
Overdraft Protection Plans in Canada
Monthly Overdraft Protection Fee: $5 per month
TD Overdraft Interest Rate: 21%
TD Non-Sufficient Funds Fee: $48
Pay-Per-Use Fee: $5 per day
TD offers two types of overdraft protection plans: Monthly Plan Overdraft Protection and Pay-As-You-Go Overdraft Protection. For all TD overdraft protection plans, you must repay your overdraft balance within 89 days. Your TD overdraft balance has an interest rate of 21%. If you don’t have overdraft protection, TD may charge a non-sufficient funds (NSF) fee of $48.
TD’s Monthly Plan Overdraft Protection allows you to pay one monthly fee for unlimited overdrafts during the month. For those with a TD Minimum Chequing Account, TD Every Day Chequing Account, TD Unlimited Chequing Account or TD All-Inclusive Banking Plan, the monthly fee is $5. Those with a P60 or Preferred Chequing Account have a discounted monthly fee of $4. Those with a TD Student Chequing Account, TD U.S. Daily Interest Chequing Account, TD Borderless Plan or a TD Minimum Chequing Account with a Student, Seniors or Registered Disability Savings Plan chequing account fee rebate can receive Monthly Plan Overdraft Protection for no monthly fee.
TD’s Pay-As-You-Go Overdraft Protection charges $5 per use to a maximum of $5 per day. This option isn’t available in Quebec.
Monthly Overdraft Protection Fee: $5 per month
RBC Overdraft Interest Rate: 22%
RBC Non-Sufficient Funds Fee: $45
RBC Overdraft Limit: $500 to $5,000, or $500 to $10,000 for RBC VIP Banking
RBC only offers a monthly overdraft protection plan at $5 per month, with a higher interest rate of 22%. The $5 monthly fee is waived for RBC VIP Banking and RBC Signature No Limit Banking accounts.
The overdrawn balance must be repaid within 90 days, and RBC requires at least one deposit each month to cover the overdraft interest due.
If you don’t have overdraft protection or you exceed your overdraft protection limit, RBC may allow an overdraft for a $5 overdraft handling fee. If your transaction isn’t allowed, RBC may charge a $45 NSF fee.
RBC offers an overdraft credit limit from $500 to $5,000, or from $500 to $10,000 for RBC VIP Banking accounts. You can apply for or remove overdraft protection, or increase or decrease your credit limit, through RBC online banking, at a branch, or by phone.
Monthly Overdraft Protection Fee: $5 per month
CIBC Overdraft Interest Rate: 21%
CIBC Non-Sufficient Funds Fee: $45
CIBC Overdraft Limit: $100 to $5,000
Pay-Per-Use Fee: $5 per day
CIBC Overdraft Protection Service offers a credit limit from $100 up to $5,000 for a monthly fee of $5 or a pay-per-use fee of $5. The pay-per-use fee is charged for each business day that you create or increase an overdraft balance. This means that you can make multiple overdraft transactions on the same day and only pay a $5 fee.
CIBC requires you to repay your overdraft balance by bringing your account balance back to positive for at least one full business day, at least once every 90 days.
Monthly Overdraft Protection Fee: $5 per month
Scotiabank Overdraft Interest Rate: 21%
Scotiabank Non-Sufficient Funds Fee: $48
Scotiabank Overdraft Limit: $250 to $5,000
Pay-Per-Use Fee: $5 per use
Scotiabank’s overdraft protection is slightly different from most banks, since Scotiabank requires you to repay your overdraft balance within 30 days. That’s a shorter time allowed than other banks, which usually allows up to 90 days. Similar to other banks, Scotiabank charges a $5 monthly fee for their monthly protection plan.
For Scotiabank’s pay-per-use plan, a $5 fee is charged for each day where an overdraft was created or increased. If you don’t have overdraft protection, Scotiabank may still allow overdrafts with a $5 handling fee and $5 for each transaction from your overdrawn account.
Scotiabank’s overdraft protection is available for most bank accounts, except for:
- Getting There Savings Program for Youth
- Scotia US Dollar Daily Interest Account
- Scotia Euro Daily Interest Savings Account
- Money Master Savings Account
- Scotiabank Momentum Savings Account
Monthly Overdraft Protection Fee: $5 per month
BMO Overdraft Interest Rate: 21%
BMO Non-Sufficient Funds Fee: $48
BMO Overdraft Limit: $250 to $2,500
Pay-Per-Use Fee: $5 per use
BMO’s pay-per-use fee is different from other banks, as BMO charges a $5 fee per transaction rather than a $5 fee per day that an overdraft was created or increased. That can cost more money than other banks if you make multiple overdrawn transactions in the same day.
This occasional overdraft protection, at $5 per transaction, is free of charge for those with a Premium Chequing account. Standard overdraft protection, BMO’s monthly plan, is also free for Premium Chequing accounts.
BMO has a slightly lower credit limit, ranging from $250 to $2,500. That’s lower than the $5,000 upper limit offered by most banks.
BMO also offers an Overdraft Transfer Service that automatically transfers funds from your other BMO bank accounts, credit card, or line of credit to cover your overdrawn account. This service costs $5 per transfer, but the fee is waived for students, recent graduates, and seniors 60 or older. You need to sign up and specify instructions for which accounts to transfer from to use this service. Up to two accounts can be used.
A credit check is required when applying for BMO overdraft protection, while no credit check is needed for BMO’s overdraft transfer service. Unlike other banks, you can’t apply for overdraft protection online or over the phone. Instead, BMO requires you to visit your branch to set up overdraft protection.
Other Financial Institutions
Tangerine charges a $5 overdraft fee per use if your account stays negative over night, up to a maximum of once per month. You can make multiple overdrafts in the same month and only pay one $5 fee. This also means you won't need to pay any monthly fee for months where you don't make any overdraft transactions. This makes the Tangerine overdraft protection fee similar to a monthly protection plan with no monthly fee for months where you don't use it. Tangerine also has a lower overdraft interest rate of 19%.
Simplii charges a slightly lower fee of $4.97 per month, with an overdraft interest rate of 19%, and no fee for months that you do not have an overdraft balance.
ATB has no monthly fee for its overdraft protection. Instead, ATB charges a fee of $4 or overdraft interest at 19.25%, whichever is greater, on a monthly basis whenever you use overdraft protection. ATB Advantage Accounts do not have a $4 monthly minimum, and will instead only charge monthly interest.
Meridian charges a low fee of $1 per month for overdraft protection, plus an interest rate of 21%.
National Bank's overdraft protection is a transfer service from a linked bank account, line of credit, or cash advance from your credit card. A $5 fee is charged for each transfer.
Pros and Cons of Overdraft Protection
Like any financial service, overdraft protection comes with its own set of advantages and disadvantages.
- Avoid Fees: With overdraft protection, you can avoid expensive NSF fees that are typically charged when you overdraw your account.
- Avoid Declined Transactions: Overdraft protection ensures that your transactions are not declined due to insufficient funds.
- Financial Safety Net: It provides peace of mind by serving as a safety net for unexpected expenses and emergencies.
- Interest and Fees: Banks charge interest on the amount overdrawn from your account, and there may also be fees associated with maintaining overdraft protection.
- Debt Accumulation: Overdraft protection can lead to accumulating debt if not managed responsibly.
- Doesn't Guarantee Approval: Not everyone is eligible for overdraft protection, and even if you are approved, the bank may still choose to decline overdraft transactions.
Non-Sufficient Funds Fees in Canada
| Bank | Non-Sufficient Funds Fee |
|---|---|
CIBC | $45 |
RBC | $45 |
TD | $48 |
Scotiabank | $48 |
BMO | $48 |
Things to Keep in Mind
In Canada, most financial institutions allow their customers to apply for overdraft protection. Banks don’t offer pay-per-use protection in Quebec, with only monthly protection available.
When you make a transaction or withdrawal that exceeds your account's available balance, overdraft protection kicks in and covers the shortfall up to a certain limit set by your financial institution.
It's important to understand that overdraft protection is not meant to be a continual source of borrowing. Relying too heavily on overdraft protection can lead to a debt trap, and the interest rates and fees are less favorable than those of regular lines of credit. They are similar to credit cards.
Before using the service, you should be aware of the terms and conditions, including:
- The overdraft limit and how it is calculated
- Any interest rates that apply to the overdraft amount
- Any fees associated with setting up and using overdraft protection
- When you're expected to repay the overdraft amount
To activate overdraft protection, you typically need to opt into the service. You will likely need to apply and qualify for an overdraft limit based on your creditworthiness. It’s advisable to read and understand all the documents provided by your financial institution to be clear on what to expect.
Overdraft protection is not the only solution for financial gaps. You could establish an emergency savings fund, consider a low-interest personal line of credit, or utilize a credit card sensibly to cover unexpected expenses. While credit cards have a grace period of interest-free usage, an overdraft exposes you to fees and interest immediately.
Managing Finances Without Relying on Overdraft
The best approach to financial management is always to plan, budget, and save. Create a realistic budget that includes provisions for savings and emergencies. Routinely monitor your cash flow, set up alerts for low balances, and review your bank statements for any irregularities. In fact, since 2022, Canadian banks have been required to send you electronic alerts when the balance of your bank account falls below $100 or an amount you've set. This lets you know when you're close to overdrawing your account, giving you time to transfer money or make alternative arrangements.
The Cost of Overdraft Protection and How to Avoid Fees
Most Canadian banks charge fees for the use of this service, in addition to any interest accrued on the overdraft amount. These fees can quickly add up, turning a minor transaction into a significant expense.
Overdraft Interest Rates in Canada
| Bank | Overdraft Interest Rate |
|---|---|
TD | 21% |
| CIBC | 21% |
Scotiabank | 21% |
BMO | 21% |
RBC | 22% |
If you regularly overdraw your account, you may want to consider signing up for a monthly overdraft protection plan rather than paying as you go. It might even be worthwhile to upgrade to a bank account plan that includes overdrafts. For example, BMO’s Premium Chequing account includes overdraft protection for a $30 monthly fee, or waived with a $6,000 balance. However, keep in mind that banks will still charge daily interest on your overdraft balance, even if the overdraft fee is waived.
Examples of Overdraft Protection Use
One-Time Use
You have an automatic monthly payment for your phone bill set up, but you forget about it and don’t have sufficient funds in your account. With overdraft protection, the payment will still go through, avoiding potential declined transaction fees. If you were signed up for your bank’s pay-as-you-go plan, you would pay a $5 fee plus interest until you bring your balance back to zero.
Multiple Uses
Let’s say that you overdraw your account multiple times in the same month. Below, we’ll compare the cost of a monthly protection plan versus a pay-as-you-go plan.
| Date | Transaction | Account Balance |
|---|---|---|
| January 1 | Deposit $50 | $50 |
| January 10 | Withdraw ($100) | -$50 |
| January 10 | Overdraft Fee ($5) | -$55 |
| January 15 | Withdraw ($100) | -$155 |
| January 15 | Overdraft Fee ($5) | -$160 |
| January 20 | Deposit $50 | -$110 |
| January 25 | Withdraw ($100) | -$210 |
| January 25 | Withdraw ($50) | -$260 |
| January 25 | Withdraw ($50) | -$310 |
| January 25 | Overdraft Fee ($5) | -$315 |
In this example, you would have been charged $15 in overdraft fees over the month. If you had a monthly protection plan, you would have only paid one $5 fee for the month.
While three transactions were made on January 25, you would only be charged one $5 fee for the day at most banks, except for BMO. At BMO, you would be charged a $5 fee per transaction or $15 for the transactions on January 25.
What if you didn’t have overdraft protection? Your bank may still approve transactions with an overdraft handling fee, or they may reject the transactions and charge a non-sufficient funds fee. Below is an example of NSF fees for a customer without overdraft protection, resulting in $225 of charges.
| Date | Transaction | Account Balance |
|---|---|---|
| January 1 | Deposit $50 | $50 |
| January 10 | Attempted Withdraw ($100) | $50 |
| January 10 | NSF Fee ($45) | $5 |
| January 15 | Attempted Withdraw ($100) | $5 |
| January 15 | NSF Fee ($45) | -$40 |
| January 20 | Deposit $50 | $10 |
| January 25 | Attempted Withdraw ($100) | $10 |
| January 25 | Attempted Withdraw ($50) | $10 |
| January 25 | Attempted Withdraw ($50) | $10 |
| January 25 | NSF Fee ($45) | -$35 |
| January 25 | NSF Fee ($45) | -$80 |
| January 25 | NSF Fee ($45) | -$125 |
If you have utilized your overdraft protection and now have a negative balance on your account, it's important to pay off the amount as soon as possible. To pay off your overdraft, you simply transfer or deposit funds into the account to return it to a positive balance. It's important to prioritize paying off your overdraft, as the longer you carry a negative balance, the more interest you will incur.
Banks may require you to make at least one monthly deposit that covers the monthly interest charged. You will also usually need to bring your account back to a positive balance within 90 days, though some banks may require repayment within 30 days.
Is Overdraft Protection Right for You?
Whether or not overdraft protection is right for you depends on your personal financial situation and spending habits. If you frequently find yourself at risk of overdrawing your account, it may be a wise decision to opt-in for a monthly protection plan. However, if you have good money management skills and rarely encounter issues with insufficient funds, then overdraft protection may not be worth the monthly cost, and you could instead opt for a pay-as-you-go protection plan.
Disclaimer:
- Any analysis or commentary reflects the opinions of WOWA.ca analysts and should not be considered financial advice. Please consult a licensed professional before making any decisions.
- The calculators and content on this page are for general information only. WOWA does not guarantee the accuracy and is not responsible for any consequences of using the calculator.
- Financial institutions and brokerages may compensate us for connecting customers to them through payments for advertisements, clicks, and leads.
- Interest rates are sourced from financial institutions' websites or provided to us directly. Real estate data is sourced from the Canadian Real Estate Association (CREA) and regional boards' websites and documents.