It’s simple to lose track of your checking account balance, but doing so could result in expensive overdrafts when you swipe your debit card at the grocery store, restaurant, or petrol station. As it automatically transfers funds from a linked account when your checking account would otherwise be overdrawn, overdraft protection can be a solution.
You can avoid the inconvenience and shame of refused transactions, overdraft fees, and returned check costs with the assistance of this bank service.
How does overdraft protection work?
Your checking account is connected to another deposit account, a credit line, or a credit card to provide overdraft protection. The funds are then automatically moved from the linked account to your checking account so that the transaction can be completed anytime you withdraw more money than you have in your checking account.
There might be a per-transfer cost, but it might be significantly lower than the penalty for overdrawing your account that would otherwise apply.
Due to the usually high overdraft costs, many consumers choose overdraft protection. According to a review of checking account fees conducted by Bankrate for 2021, the typical overdraft fee is a whopping $33.58.
Types and costs of overdraft protection
To set up overdraft protection, there are numerous options. Depending on where you bank, you can have one or more options.
Among these choices are:
- Linked deposit account: Another checking account or a savings account is linked to the protected account. You may pay a transfer fee when the protection is triggered, but any such cost is still likely cheaper than paying an overdraft fee. You’ll need sufficient funds in your linked deposit account to cover the overdrawn amount to use this service.
- Overdraft line of credit: This feature links your protected account to an established line of credit. You borrow against that line of credit to cover the shortfall when you overdraw. In addition to a transfer fee, you’ll pay interest on the borrowed balance until you pay it off.
- Linked credit card: This service works similarly to an overdraft line of credit except the account is linked to your credit card. When an account is overdrawn, a cash advance from a credit card automatically covers the amount. You’ll usually pay a fee for the cash advance as well as the interest on the balance.
It’s crucial to understand the interest rate you’ll pay on any transferred amounts when using overdraft protection that relies on a line of credit or a connected credit card. By institution and account type, rates change. Before committing, read the terms and conditions.
An illustration of banks and the costs they impose for various forms of overdraft protection:
|Chase||Linked deposit account||$0*|
|Citizens Bank||Overdraft line of credit||$12 fee per day when a transfer is made, plus interest on balance|
|Commerce Bank||Linked credit card||5% of the transfer amount (with a $10 minimum) plus interest at the cash advance rate|
|Fifth Third Bank||Linked deposit account||$12 per occurrence, unless the overdraft is $5 or less/td>|
|TD Bank||Linked deposit account||$3 per day when a transfer is made|
Do you need overdraft protection?
The extent to which you require overdraft protection generally depends on your spending patterns. If you frequently overdraw your account, overdraft insurance might be a useful method to prevent paying exorbitant overdraft penalties.
Not always is overdraft protection free. You risk accruing a sizable load and paying a lot in interest if you use a connected credit card or line of credit.
If you utilize overdraft protection as a convenience to ensure that transactions clear when you periodically overdraw, and you promptly pay back any cash advance, you shouldn’t experience any problems.
Other means to avoid overdraft fees
Overdraft fees are being eliminated or reduced by banks as a result of pressure from lawmakers and consumer organizations to do so. However, some banks continue to impose overdraft penalties, and those that don’t may merely reject transactions that might lower your amount. Here are several strategies to avoid incurring overdraft penalties and preventing a negative balance.
The simplest approach to avoid overdraft fees is to monitor your account balance and to cease spending if the balance drops too low, or to transfer money into your account. If you frequently get overdrawn due to overspending, make a budget that is more in line with your spending habits.
Another strategy to avoid paying costs is to select a bank that restricts the amount of overdraft fees each day. Banks that have a charge cap include Regions Bank, Comerica, and Chase.
In some bank accounts, like Varo and Chime, automatic overdrafts are offered without charge. The gap is made up when your next paycheck is deposited into the overdrawn account.
Additionally, you have the option of declining to have your bank pay any overdraft fees. You are free to reject either service; neither overdraft protection nor automatic overdrafts are necessary. If there are insufficient funds or an overdraft program, the transaction will simply be denied. However, be sure to review your bank’s non-sufficient funds (NSF) fee policy. You won’t benefit much if you choose to forego overdraft protection if the NSF fee is equal to the overdraft fee.
You might even be able to haggle a refund of an overdraft fee with your bank. If you don’t want to contact the bank directly, you can monitor your account using online programs like Harvest and Cushion and have them start a request on your behalf.
Anyone who has enough in their savings account to cover an occasional overdraft or who is likely to be able to repay an overdraft cash advance on time may choose to consider overdraft insurance as a safety net. You might be able to avoid having to pay hefty overdraft fees with the aid of an overdraft protection transfer.