OVERDRAFT PROTECTION EXPLAINED

Overdraft protection is a service provided by some banking and financial institutions that can prevent the customer from “bouncing” a check. Traditionally, if a consumer were to spend more than the limit available in his or her account, a notice of insufficient funds would be sent to the merchant and payment denied. This can result in hefty fees from the merchant and the bank, in addition to potential legal ramifications. However, this protection helps ensure that this does not happen. However, there are guidelines to usage.

How Does It Work?

The financial institution covers the amount of the transaction and debits it from the users account. Depending on the bank and the plan, the money may be removed from an available and linked savings account. If there is not a linked savings account with enough funds, the checking account will then be debited but reflect a negative balance that is expected to be restored. This service is not free to use. A fee may be assessed for each and every transaction that has been covered.

How Much Does It Cost?

As previously mentioned, the bank often charges per transaction. These fees can vary significantly and can range anywhere from $25 up to $50 in some instances. This is on top of the funds that were paid on your behalf. So, if there was a debit of $25 with a $0 balance and a $25 fee, $50 would be needed to break even. The fee can be found in account terms and is almost always a flat one-time fee for each transaction presented to the checking account.

Can Overdraft Protection Be Utilized with Savings?

Yes, depending on the financial institution, overdraft protection may be extended to a savings account but this is less common. Not only is this based on the individual bank but also on the type of savings account. Typically, it is reserved for the savings account that has a debit card. It has the same concept as a checking account but terms may differ as a savings is interest bearing.

Is This Service Automatic?

No. Not all banks or account types offer overdraft protection to the consumer. This is something that either the customer must enroll in or open a specific type of account in order to be eligible. The user must be enrolled prior to taking advantage of this type of service. The financial institution does retain the right to limit or terminate the enrollment in such programs.

Are There Limitations?

There are limitations to overdraft protection and they will vary by the financial institution. These limitations may include but are not limited to caps on the amount of protection, the number of overdraft coverages within a specific time period and type of transaction. For example, some may only offer protection for checks and electronic transactions, while another institution may extend this to withdraws made at an ATM as well. They may only allow the customer a limited number of overdrafts per billing cycle or per year.