What is Overdraft Protection?
In many cases, when you bounce a check, it gets returned unpaid to the company or person who deposited it. In addition to the fee usually assessed by the recipient of the check, your bank may also assess a service charge to you for having written a bad check. If the overdrawn amount is insignificant and you have a long standing account with a bank, the bank may pay your check, but still assess a fee for payment. If you’re in the habit of bouncing checks, these fees can be as high as 30 US dollars (USD) even if you only overdraw your account by a dollar. In response to the occasional bounced check, some banks offer overdraft protection.
With overdraft protection, you are still assessed a fee for any bounced checks or ATM transactions exceeding your account balance, and the extent to which you can borrow from your bank may also be set. You might have a 300 USD limit on overdrawing your account. If you exceed this limit, the bank will start bouncing your checks. Fees range from 0 to about 30 USD for a single check which overdraws your account. Standard amounts are usually around 10-15 USD for using overdraft protection services. This can be a fairly high price to pay if you overdraw your account by a few dollars.
If you don’t replace the overdrawn money, plus the fee, within 30 days you are usually charged interest on overdrawn amounts. Further, if you make a significant banking error and bounce several checks, even for small amounts, you can quickly reach the maximum amount set by your overdraft protection because of the fees. It can become very costly to make use of overdraft protection on a regular basis.
Some overdraft protection plans do not assess a large fee for overdrafts. Instead if you also have a savings account with a bank, they may, with your permission, merely draw on the savings account if a check exceeds your bank balance. Some banks can still be fairly miserly and assess a fee for this service, still in the range of about 10-15 USD. Others may offer it free of charge, since the bank is not advancing you any money. The money used to cover the check is your own. Other banks assess a small “service fee” of a dollar or two if they must draw on your savings account, because it does involve some extra steps.
The benefits to providing your own overdraft protection through a savings account are that you don’t owe the bank interest on overdrawn amounts. It can help to find a bank that will offer you this service for free or at a very minimal fee, particularly if you are not good at balancing your checkbook. It is important to keep records of deductions taken from your savings account, because overdraft protection services based on a savings account don’t work if the savings account is out of money.
Since keeping records proves challenging for many, customers now often look for online banking services instead of overdraft protection; although they may look for both. Usually with online banking, any transactions are immediately recorded, though checks may not show up until cashed by recipients. With checks used less frequently, online banking provides an excellent means to always knowing what your balance is, which can help translate to utilizing overdraft protection less frequently and fewer fees assessed by your bank.
@Comfyshoes -I agree that having an overdraft protection for the checking account is important because you could make a mistake and at least the bank will help you out.
I had a friend once that was given a check to cash that bounced and that overdrew her account. She was issued another check by the company that did clear, but that was a little scary. The bank used the overdraft protection and the company that issued the original bad check paid the insufficient fund fees.
It worked out, but I bet it would have been more stressful if she did not have a checking account with overdraft protection.
I think that overdraft protection fees can still be sizeable, but I believe that it is worth having because the overdraft fees are better than the insufficient fund charge when you bounce your check. Also, if you bounce a check, it can also affect your credit rating.
My bank secures the money from my savings account, so as long as I have money in my savings to cover the overdraft, I will not get charged anything. I have never been overdrawn but in the event that I make a mistake I know the bank will fix the problem for me at no charge. It really gives me peace of mind.
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