Can you overdraft a savings account? In short, the answer is “yes.” Any time you spend more than you have in the bank, your account will be in overdraft. While the best way to avoid overdrafts is to spend less than you make, that doesn’t account for mistakes in math or in miscommunication with other people who use the same account. So, what can you do to protect yourself from overdraft fees? One of the thing we recommend (if your bank allows it) is to link your savings account to your checking account. Every time you overdraft on your checking account, the bank will automatically pull money from your savings account to prevent you from paying high overdraft fees. Here are some pointers and explanation about how this works.
Savings account links
A lot of banks (just ask your banker) will allow you to link your savings account to your checking account. Sometimes, the bank won’t even charge you for automatic transfers but it is likely that they will. You can be sure that that transfer fee will be much lower than an overdraft fee. This link kind of acts as a line of credit, so if your checking account runs out of money, your savings account is automatically raided.
One of first bank to do that was TD. TD Savings Overdraft Protection is a type of overdraft service that will link to your savings account. If your checking account runs dry, you can automatically have your savings provide the funds for a small transfer fee. There just has to be enough money in the accounts to pay this.
Overdraft Line of Credit
Another way to overcome expensive overdraft fees are Overdraft Line of Credit. This is basically a loan that is connected to your checking account. The bank’s money just sits there until you overdraft your account. But as soon as your checking account or savings account goes dry, the loan kicks in and covers your purchases.
Some people set up both a savings account link and an overdraft line of credit. They have the savings account link to the checking account, and then a bank line of credit to fall back on in case their savings account is dry.
Your overdraft line of credit is a loan-in-waiting. Once you dip into it, you will start paying interest on the amount you “borrowed” to cover your extra expenses. This interest, however, is much less than you would pay on bounced checks, and can protect your credit score if you are making payments that absolutely must go through. It will also save you the inconvenience of having your debit card rejected.
Overdraft protection program
Let’s take a step back. You don’t actually have to pay overdraft fees… if you don’t overdraft! Overdraft protection services allows you to go negative in your account but at a very high cost. Overdraft protection lets you borrow money from the bank directly and that’s why it is so expensive. You can enable this service for free but if you actually USE the it, it will cost you $35 per transaction.
FIND OUT>> How much your bank charge you for overdraft fees
Some banks provide you an overdraft protection program even though you have never signed up for it. You should be aware that this is an optional service. The stinger is that if you DON’T have overdraft protection, the bank will reject your check, charge you the $35 insufficient fund fee, and the vendor from whom you made a purchase will also charge you a returned check fee!
What causes overdrafts?
Well, the obvious answer is overspending. However, some attempted purchases won’t produce an overdraft. If you do not have overdraft protection, these are some of the results:
- Debit Card: Plenty of people today use their debit cards for daily shopping. That Café’ Mocha at Starbucks, the drive-up pharmacy window – all of these are often debit card purchases. Most of the time, if your bank account is out of money, these purchases will be denied at the point of sale. This is good, because it doesn’t cost you anything but your dignity. A note of warning, here: GAS PUMPS! When you use your debit card at the gas pump, it automatically debits your account for about $70. Once you have finished filling up, it will return the balance. BUT – if you don’t have that much money in your account, it will register as an overdraft! AND your debit card will be rejected. So, you are out of money, and out of gas.
- ATM Withdrawals: Your ATM will be honest with you and tell you “no way!” And that means, no charge!
- Preauthorized Drafts: You know, the car insurance, student loans, and other bills that are paid automatically by the bank? Yeah, if you have insufficient funds, those will be rejected by the bank. Then, you‘ll have to pay that $35 fee to the bank and an additional one to the entity that was supposed to receive the payment.
- Checks: Believe it or not, people still use paper checks. Most points of sale these days electronically process the check on the spot, and it will be rejected at the counter while you can still provide alternative payment (or write an overdraft check if you opt-in for overdraft protection). If it’s a check you mail off, you will have the overdraft fee, returned check fee, yada, yada, yada.
All of this embarrassment and extra expense can be avoided if you have overdraft protection as long as you do not exceed your loan amount or the $200.
Better overdraft solutions
In general, the savings account link is less expensive than an overdraft fee. If you don’t have a savings account, try one of the overdraft protection apps on the market. Some of them are free, and most have very reasonable fees and low interest.