What is overdraft protection?
Overdraft protection is an option offered in bank accounts that prevents check, ATM or debit card transactions, as well as bank and wire transfers, to keep a user’s account balance falls below zero, triggering overdraft fees or insufficient funds. (NSF) fees.
With overdraft fees, the bank covers the shortfall and charges the services with the fees, so that the transaction goes smoothly, which is why it is also called “courtesy fees”. With an NSF, the transaction is not covered by the Bank. Unauthorized transactions made with a check and ACH withdrawals are returned unpaid, a practice known as “bouncing”. Most banks charge large overdraft fees and NSFs (between $ 30 and $ 35 on average) for accounts that do not have enough funds.
Key points to remember
- Overdraft protection is a guarantee that a check, ATM, bank transfer or debit card transaction will be erased if the account balance falls below zero.
- There may be high fees and interest associated with overdraft protection, depending on the type of linked account used.
- Overdraft protection lines of credit can range from $ 250 to $ 5,000 or more.
Why use overdraft protection?
Insufficient (or insufficient) fund transactions can be costly and disruptive. Not only can the bank refuse payment and charge the account holder NSF fees; a penalty or fees may also be charged by the merchant for the failed transaction. If you bounce a check, you may incur various charges or, in extreme cases, have your bank close your account, which compromises your chances of opening a new checking account.
Customers who choose overdraft protection can link their checking accounts to credit cards, savings accounts or other lines of credit to avoid triggering overdraft fees or NSF. This is equivalent to a pre-approved loan or transfer which occurs automatically when a customer checks, makes a bank transfer, swipes a debit card or requests an ATM greater than the balance of an account.
Overdraft protection, sometimes called “cash reserve verification”,Most often used as a cushion to verify accounts, but it can also be applied to savings accounts. Banks have the right to refuse loans or money transfers if they do not comply with the rules of the overdraft protection agreement.
Bank customers can activate or deactivate overdraft protection for their checking or savings accounts.
How Overdraft Protection Works
Typically, an overdraft protection agreement comes into play when an account holder withdraws more than the current balance from a current account. In this case, the individual or business with a linked account must pay transfer fees to facilitate the transfer of funds to cover the shortfall. The account holder may also be charged additional fees each month for using overdraft protection or a fixed monthly fee for continuing protection.
In the absence of overdraft protection, it is not uncommon for banks to charge several overdraft or NSF fees per day, for example when a consumer makes successive purchases without realizing that the amount of his account insufficient to pay them. Many banks also charge extended overdraft fees if a checking account becomes negative for more than a few days. It is important to note that even if an account holder has overdraft protection, banks will continue to charge these additional fees.
Example of overdraft protection
A tenant with overdraft protection and a linked account writes a check for $ 800 to cover the monthly rent on an account that contains only $ 650. Instead of bouncing the check due to insufficient funds, the tenant’s overdraft protection comes into play when the check is cashed.
Then, the bank charges a $ 15 transfer fee for approving a debit transaction that exceeds the funds available. The tenant will now have a balance of $ 635 ($ 650 – $ 15) and will have to repay $ 800 by credit card, line of credit or savings account.
Overdraft protection lines of credit can range from $ 250 to $ 5,000 or more and, of course, come with an interest rate. If a credit card is used, it should be noted that the amount is treated as a cash advance. This has no grace period and usually results in a high interest rate, as well as a cash advance fee (usually a flat fee of $ 10 or 5% of the advance, whichever is greater. ), making it a fairly expensive form of overdraft protection. A linked savings account is probably the cheapest solution, but of course it should contain enough money to cover the funds needed.
Overdraft protection trends
In 2020, the median overdraft fee was $ 34 among the 50 largest U.S. retail banks (by deposits) according to the CFPB. Small institutions and credit unions tend to charge less (a median of $ 31), and some banks, such as online banks, do not charge overdraft fees. The most common overdraft fee is $ 35. Many view overdraft fees as excessive, but in the short term banks are unlikely to tackle them, as in mid-2020 CFPB acting director Mick Mulvaney halted regulatory plans to reform them .