Oh wheee, this is what I worked on in DC. There are a few different things that can happen when you try to make a purchase on a debit card with insufficient funds:
the merchant sees you don’t have the money, the card is declined, and you pay the bank nothing
the bank transfers money from a linked account (usually a savings account or line of credit) and charges a fee for this service (median $10, at least back in 2012)
the bank covers the cost of the purchase, which you now need to pay back, along with a fee of (at median) $35
The law changed recently (in the last 5 years) so that banks have to ask you to opt-in to overdraft. If you take no action, when you try to buy something with your debit card you don’t have the money to cover, you just can’t do it, and you incur no fee. So, banks have done a big push to get people to opt-in, including using the “Overdraft Protection” language, but, for most people, it’s a bad choice.
And, fun fact, some banks reorder your purchases, when they’re processed, in order to maximize the number of overdrafts you incur. (i.e. if you had $20 in you account and bought, in order, items costing $5, $5, $5, $20, some banks reorder your purchases high-to-low so they can charge three overdraft fees instead of one). You can see a graphic with data from a real world case here.
Fun Fact, if you overdraw and are protected by a bank transfer from a linked account but that linked account is also insufficient, you get charged both fees – one fee for the transfer, and another for not having enough after the transfer! How can they justify this? Easy, the fee for just a transfer, not guaranteeing you that your transfer will be adequate.
Oh wheee, this is what I worked on in DC. There are a few different things that can happen when you try to make a purchase on a debit card with insufficient funds:
the merchant sees you don’t have the money, the card is declined, and you pay the bank nothing
the bank transfers money from a linked account (usually a savings account or line of credit) and charges a fee for this service (median $10, at least back in 2012)
the bank covers the cost of the purchase, which you now need to pay back, along with a fee of (at median) $35
Both the second and third option are sometimes called Overdraft Protection. There is no industry standard term, so it can be very hard to contrast between banks and disambiguate overdrafts covered by a transfer and regular overdrafts. (You can see the 14 different terms we found across 24 banks and credit unions here).
The law changed recently (in the last 5 years) so that banks have to ask you to opt-in to overdraft. If you take no action, when you try to buy something with your debit card you don’t have the money to cover, you just can’t do it, and you incur no fee. So, banks have done a big push to get people to opt-in, including using the “Overdraft Protection” language, but, for most people, it’s a bad choice.
And, fun fact, some banks reorder your purchases, when they’re processed, in order to maximize the number of overdrafts you incur. (i.e. if you had $20 in you account and bought, in order, items costing $5, $5, $5, $20, some banks reorder your purchases high-to-low so they can charge three overdraft fees instead of one). You can see a graphic with data from a real world case here.
Fun Fact, if you overdraw and are protected by a bank transfer from a linked account but that linked account is also insufficient, you get charged both fees – one fee for the transfer, and another for not having enough after the transfer! How can they justify this? Easy, the fee for just a transfer, not guaranteeing you that your transfer will be adequate.