Overdraft Protection 101

Learn the ins and outs of overdraft protection

Have you ever made a transaction and caused the balance of your account to dip below zero? That’s called an overdraft, and it’s a common occurrence among many. In fact, nine out of every 10 Americans have a checking account, and 18 percent of them have endured an overdraft within the year, according to a 2012 Overdraft America study.

Some of the most frequent times an overdraft can happen are when someone cashes a check before money was deposited, when an automatic payment withdraws money before money was deposited into the account or during other banking miscommunications — especially if your account has cash going in and out multiple times a day, things can certainly get confusing.

Financial institutions know this is a common situation. That’s why many of them offer overdraft protection, a protection program that covers the amount of an overdraft — whether it be ATM withdrawals, debit card purchases or electronic transfers and bounced checks. Essentially, overdraft protection will provide you with an instant loan instead of charging you a hefty fee for a bounced check.

Another option for overdraft protection is linking your account to a savings or other account, where money can be transferred over from in the event of an overdraft. Also, some financial institutions allow the use of a credit card as a possible overdraft protection.

“It’s a good idea, assuming the fees are reasonable and the credit card rates are reasonable,” says Jean Ann Fox, director of consumer protection for the Consumer Federation of America.

“It just gives customers another option,” says Mary Beth Navarro, a retail financial institution customer service manager. “Not every customer has a savings or money market account. And it’s less expensive than if you were to have an overdraft.”

However, there’s some controversy about overdraft protection programs. Some experts, like Greg McBride, CFA and Bankrate’s senior economic analyst, see a few bugs in the system.

“It doesn’t relieve consumers of the obligation to keep accurate tabs on their account balance,” he says. “Even though an ATM or debit card transaction won’t go through without our prior consent, if the balance is that low, the check written yesterday won’t clear and the online payment scheduled for tomorrow won’t clear.”

And keep in mind that if you’re consistently enduring overdrafts on your account, the fees could accumulate quickly, as many financial institutions do charge when the account balance is below zero (although the fee is typically less than that of a bounced check).

“A lot of people use their debit cards several times a day, so you could easily rack up hundreds of dollars worth of fees,” points out Leslie Parrish, senior researcher at the Center for Responsible Lending in North Carolina.

Either way, no one can argue the many pros that come out of overdraft protection. If you’re deciding whether you should get overdraft protection, give us a call or stop by today to see how we can help you.