Do you shop or pay bills even though your bank account is below zero? Then, you can do this through the overdraft protection program offered by your banking institution.
By definition, overdraft protection is a service whereby your bank pays for a transaction when there is not enough money in your checking account. For this, the bank charges you a so-called overdraft fee.
Previously, consumer banks automatically added this feature to all checking accounts, but now this service requires your formal consent. Once you understand how overdraft protection works, you will most likely be able to determine if it is right for you, given the nature of your expenses and budget.
How the overdraft protection works?
If there is no money on your current account to carry out a transaction, the bank, in certain cases, pays for it for you, charging an overdraft fee.
Let’s see you need to pay $ 100 using your debit card, but you don’t have them in your checking account (or you have enough funds in your account, but they are not yet available for spending).
If you have activated the overdraft protection service, the bank will approve this purchase with a debit card and you will be able to make it. However, this will cause an overdraft on your account, that is, the balance on it will be negative. The bank will charge the overdraft fee and require immediate deposit of funds to cover the $ 100. And if you have not connected this service, the bank will reject the transaction, but it will not take any overdraft fees either.
The provision on consent to overdraft protection applies only to one-time charges and ATM transactions. But if you write a check or make a recurring payment that will result in an overdraft on your account, your bank can still pay them on your behalf and charge an overdraft fee, even if you did not agree to this service. However, the bank may also decide not to make these payments, in which case you will not be charged an overdraft fee. That is you may still have to pay an underfund fee comparable to the overdraft fee. Usually, if a debit card transaction is declined, then you will not be charged this fee. If the bank returns the check without payment, you may also have to pay a fee for the returned check.
Pros and cons of overdraft protection
The main advantage of overdraft protection is that you can pay for extra expenses with it, even if you don’t have enough money. You can also avoid fines or fees that you would have to pay if you are late due to temporary financial difficulties. Another advantage is that you can avoid the unsecured check return fees charged by retailers, provided you pay by check and the bank approves the payment. The recipient of the payment will not even know that you did not have enough money. This will help you avoid embarrassing situations, especially if you are sending a payment to a friend or business partner.
However, overdraft protection is not cheap. It can become especially costly with per-transaction fees if you use it regularly. Overdraft fees may be charged to you several times in one day. In this case, the most likely reason for this commission is insufficient funds, and after it is debited, you will have even less money. In addition, the bank may deactivate this service if it decides that you are using it irresponsibly. To make matters worse, repeated instances of overdraft can lead to negative performance on your ChexSystems report (your checking and banking history), which in turn can prevent you from opening a bank account.
Finally, by using overdraft protection too often, you have the risk of developing bad habits that will cost you dearly in the future. Dependence on overdraft protection may indicate that you need to learn how to better manage your money.