How does overdraft protection work

Google+ Pinterest LinkedIn Tumblr +

Everybody makes a mistake now and then. That’s why overdraft protection can help us out. We may try to use our debit card or write a check when there is no money in the bank, and run into real trouble. With overdraft protection, we can cross the line and use money that is not yours. Banks can no longer add this service automatically to checking accounts, so you have to opt in if you want it, and it usually has attached fees. But, how does overdraft protection work?

An Overview of Overdraft Protection

Overdraft protection will give your bank permission to cover a payment if you run out of money in your account. For example, if you use your debit card for a purchase but the money is not in your account, the bank will go ahead and honor your purchase rather than declining your card. They expect you to pay them back.

These overdraft plans do have limits, usually based on the amount of coverage you have signed up for with the bank. If you constantly live on the fringe, though, your bank may choose to stop overdraft protection for your account.

Fees and Expenses

You know of course, that banks do not offer overdraft protection for free – click for the full list of overdraft fees by bank. Charging fees for this service creates income for the bank and discourages abuse. Your best advice is to make sure you know what the fees for overdraft protection are with your bank. It is usually the same as a non-sufficient funds fee. The difference is, the bank will still honor your purchase so that you don’t get returned check penalties from vendors.

If your overdraft protection is by way of an overdraft line of credit, you may save money by paying interest rather than paying a flat fee for each overdraft.

Keep in mind, too, that if you seem to be using your overdraft protection quite often, you have developed some bad habits. This can cost you dearly over the years and can indicate that you can’t manage money very well. This may not affect your credit report, but credit unions and smaller banks will question whether or not they can consider you a credit risk. Persistent overdrafts can even result in civil or criminal charges.

Pros and Cons of Overdraft Protection

Pros:

  • You avoid returned check fees
  • You avoid embarrassment at the point of sale
  • You have backup for occasional miscalculations

Cons:

  • Overdraft protection can help you learn bad habits.
  • Overdraft protection is often quite expensive

The bank’s overdraft protection can save you some embarrassment and keep you afloat occasionally. But, some people use overdraft protection apps. These apps can loan you money at a fraction of the cost of your overdraft fee. If you are in a situation where you feel that “I need a loan” (larger than a few hundred dollars) in order to survive, online lenders could be a better solution to your problems.

Summary
How Does Overdraft Protection Work?
Article Name
How Does Overdraft Protection Work?
Description
Everybody makes a mistake now and then. That’s why overdraft protection can help us out. We may try to use our debit card or write a check when there is no money in the bank, and run into real trouble. With overdraft protection, we can cross the line and use money that is not yours.
Author
Publisher Name
OverdraftApps.com
Publisher Logo
Share.

About Author

Johnathan has been an editor for financial blogs and magazines for over 10 years, and now serves as the Chief Editor and Founder of OverdraftApps.Com. He holds a B.A. and M.A. in Economics.