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My savings account earns interest; my checking account does not. I have overdraft protection, so if I overdraw the checking account, the money comes out of the savings account. It seems like I could earn interest on all my money by keeping it all in savings and using overdraft protection on every purchase. It seems like if that works, it would be common, so it probably isn't a good idea; why not?

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    I suspect that if there isn't something in the Ts&Cs about not doing this, there would be if enough people tried it!
    – TripeHound
    Commented Sep 17, 2022 at 16:06
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    I briefly was able to do just this, when my bank introduced automatic transfers as overdraft protection. After about four months of everyone abusing the privilege this way, they set a limit in number of transfers before penalties were again applied. I presume every other bank has had time to learn the same lesson; it makes a hash of their attempts to draw a distinction between checking and savings accounts and decrease interest for the latter.
    – keshlam
    Commented Sep 19, 2022 at 2:19
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    It's interesting how banking differs across countries. Here in the UK, I run my accounts as you describe. One bank sends me text messages the day before when scheduled payments will take me into overdraft (which doesn't incur a fee, but does charge interest at 40% a year), so that I can move funds in to avoid that. Several banks also offer decent interest on checking account balances up to £1,000–£2,500. Some savings accounts here have limits on withdrawals, but many don't. Commented Sep 19, 2022 at 9:43
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    Is the amount of interest you could earn doing this over the course of a single month enough to matter? Unless you have an incredible amount of monthly expenses, I would expect to find more change under the couch cushions. Commented Sep 19, 2022 at 18:10
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    @PaulD.Waite US banks and brokerage firms will do this for you. It's called a sweep account or cash sweep. OP basically wants this service.
    – user71659
    Commented Sep 20, 2022 at 5:47

7 Answers 7

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There are several issues with this plan.

  • The financial institution may limit the number of free overdrafts they allow. After that they charge a fee.
  • When they cover a check/debit card transaction that would bring your account below zero, they only transfer enough money to bring the account back to zero. Unless you make your own transfer to the checking account you could hit your monthly limit before you realize it.
  • In the United states a savings account can only have a handful of withdraws each month. Each overdraft transfer counts against that limit. That might mean that you might lose the ability to make transfers unless you go to a teller. That can be very inconvenient.

The fees could easily swamp the small amount of interest you would be earning by keeping your checking account balance very small.

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    In US the limit of 6/mo 'convenient' withdrawals or transfers from savings is no longer required by the Fed, but is still in place at some (many?) banks; see depositaccounts.com/blog/2021/04/… . Commented Sep 18, 2022 at 4:55
  • It would be worth mentioning two additional things for this overwise great answer: 1) The interest a savings account accrues is insignificant (literally fractions of a percent typically) and 2) If OP meets account average balance minimums, a Money Market account is what OP is after since they earn substantial interest (versus a savings account) and most allow spending with a debit-like card directly from the account.
    – SnakeDoc
    Commented Nov 18, 2022 at 20:45
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Aside from the other answers, which are very good, there is this. Your savings account likely gains interest at a ridiculously small rate, less than 1%. Unless you have many thousands of dollars in the account you are flirting with disaster for literally pennies a year.

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    Disaster? Surely not?
    – TonyK
    Commented Sep 19, 2022 at 0:15
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    I would say, yes, disaster. Do you really want to hope and pray you have read all the fine print about your OD protection correctly? And is that ten cents worth of interest worth a hefty overdraft fee or ding on your credit score?
    – nuggethead
    Commented Sep 19, 2022 at 1:19
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    Oh, OK, when you said "disaster" you meant "negative outcome".
    – TonyK
    Commented Sep 19, 2022 at 2:48
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    @TonyK It would be a disaster to wake up one day and find your account balance now zero because the bank charged you dozens or more overdraft fees... and you didn't bother to understand the terms that allowed them to do this. Now you have to fight to get back your own money... and the bank would have no real obligation to grant you wishes at that point. So yes... a disaster.
    – SnakeDoc
    Commented Nov 18, 2022 at 20:48
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I know I once got warned about drawing from my savings account too many times within a certain amount of time (maybe four times in a month and a fifth would have triggered a fee). If you have similar terms, you might wind up getting hit with a fee that wipes out the minuscule amount of interest you would be earning by keeping everything in your savings account.

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I don't know who you bank with but Chase will happily close your account for you:

VIII. Closing Your Account

Either you or we may close your account (other than a CD) at any time for any reason or no reason without prior notice. We are not required to close your account at your request if you have pending transactions, the account is overdrawn, your account is subject to legal process (such as a garnishment, attachment, execution or levy) or any type of holds (such as collateral hold, decedent hold or deposit hold). In those cases, we will limit the types of transactions that you can make until pending transactions are paid or returned, the balance is no longer negative and any legal restriction/hold has been released. After we restrict your account in preparation for closing, we will not pay any additional interest on the account. We may automatically close your account if the balance is $0 or negative. Either you or we may close your CD account on any maturity date without cause.

We may send you written notice that we have closed or will close your account and return the balance less any fees, claims, setoffs or other amounts if the balance is greater than $1. After your account is closed, we have no obligation to accept deposits or pay any outstanding checks, but we may reopen your account if we receive a deposit. We will have no liability for refusing to honor any check drawn on a closed account. We may advise consumer reporting agencies of accounts closed for misuse, such as overdrafts.

This agreement continues to apply to your account and issues related to your account even after it closes.

https://www.chase.com/content/dam/chasecom/en/checking/documents/deposit_account_agreement.pdf

Checking accounts are usually subjected to fees if you don't keep the balance high enough. This requirement and fee can be avoided if you direct deposit your earnings into the account.

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At least in the United States, even if your bank allowed it, most people don't have enough savings to notice the effect. Savings interest is typically calculated based on average daily balance, so if you're constantly draining your savings, it may as well just be in checking.

There are far more interesting products out there: SoFi and Stash give you actual stock when you make purchases, Amazon and Capital One have decent cash back rewards, and Credit Karma actually randomly refunds payments made on their debit card, meaning you could get hundreds or thousands back by paying utilities and rent that way, and so on.

Given how many options are out there, it makes sense for the average person to utilize one or more of these products to improve their financial outlook one step at a time. And, of course, it'd be better to use a 401k or IRA in most cases, as they tend to perform better than most savings accounts (but do carry some risk).

Of course, all of this depends on your financial goals and situation, but analytically speaking, using overdraft protection with savings to back it up is relatively high risk with low rewards for most people. The risk is that if you overdraft your savings account, if allowed, it could cost you a lot of money, while if you only have a small balance, your interest payments are only going to be a few pennies.

If you have enough money in savings to make it worth the interest, you probably have enough left over to start investing in stock or other options, and if you don't have enough to earn decent interest, then there are better alternatives out there for you. I don't think there's any particular scenario where this is the best possible financial vehicle.

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You basically can if the bank wants you to. Banks offer this directly as service, referred to as a sweep account. The bank automatically transfers money from an investment account into a checking account as necessary, and any deposits are automatically placed into investments. Typically the investment account is a non-deposit high-liquidity investment that is not insured, such as a money market fund.

Due to regulations on banks, sweep accounts are most often offered by brokerages. Often they are not advertised explicitly as a sweep account, but rather as the ability to write checks and use a debit card against a investment account. Sometimes they are also called cash management accounts.

Sweep accounts are also very commonly used by businesses, for the same investment reasons, and also to maximize deposit insurance coverage: the accounts being swept to and from may be at different banks or held under different entities. Here they may be called zero-balance accounts.

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It depends on your bank; I've been doing this for years. In fact, a bank rep told me to do it. Now my bank sends me an email whenever the checking account goes into overdraft and I have until midnight to clear it before I'm charged interest. I use a discount ebank in Canada, a subsidiary of one of our big 5 major banks. They're great because they pay good interest and have no fees and no minimum balance.

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