An overdraft occurs when you write a check, use a debit card or ATM card in a transaction, or make an automatic bill payment for an amount greater than the balance in your checking or savings account.
Overdraft protection is a feature offered by banks to keep your checking account from overdrafting when you write a check or swipe your debit card but don’t have enough money in your checking account to cover the balance.
Overdraft Protection Saves You Money
Overdraft protection links your checking account to a savings account, credit card, or line of credit and uses that account to pay transactions that would have otherwise triggered an overdraft fee.
Credit Card and Line of Credit Overdraft Protection
You must be careful when overdraft protection is linked to your credit card. Some credit card issuers treat these overdraft payments as a cash advance. That’s a bad thing because cash advances often have higher interest rates, no grace period, and a cash advance fee. You could end up paying just as much, and possibly more, on the cash advance as you would have paid in overdraft fees.
When your overdraft is connected to a line of credit, you risk paying fees on the overdraft if you don’t pay the balance before the grace period runs out – if there is a grace period. If you already have a balance on your line of credit, the overdraft would just be added to your current balance.
When Does an Overdraft Occur?
An overdraft occurs when you do not have enough money in your account to cover a transaction and pay the bank anyway. You may incur an overdraft checks, ATM transactions (ATM / ATH), debit card purchases, automatic bill payments and electronic withdrawals or in person.
Many banks and credit unions offer overdraft protection programs, in which the bank or credit union usually pays the transaction and charges a fee (in addition to force him to pay the amount of the overdraft). Overdrafts can also be covered by a transfer of funds from a linked account, credit card or line of credit.
Banks and credit unions have different charges associated with overdraft protection, so be sure to ask what the conditions of the account in relation to the cost of overdraft protection, a linked account or a credit line is when acquires a current account.
Deposits to your account may not be available immediately. Always make sure you have sufficient funds available in your account. Although just made a deposit, you can overdraw your account.
Protection for ATM and Debit Card Transactions
Prior to 2010, many banks and financial institutions automatically enrolled their customers in overdraft protection programs. Often you had to affirmatively say “no” in order to end the coverage.
Now, if you want overdraft protection for standard debt and ATM transactions, you must affirmatively opt into the program.These rules don’t apply to writing checks or automatic bill payments. If you don’t want overdraft protection for writing checks with insufficient funds or automatic bill payments, talk to your bank.
There’s another form of protection that you don’t sign up for; many institutions automatically initiate the coverage if you overdraw your account. This type of protection is often called overdraft privilege or bounce protection, or some variation of those terms. Because of the similarities in name, it can be easy to confuse the two types of overdraft protection.
An easy way to differentiate — you don’t sign up for bounce protection; you’re automatically enrolled, and it’s not linked to other accounts you may have with the bank for your best interest.
Most institutions that have this type of coverage automatically enroll just about all of their checking account customers. You might receive a notice from your bank or credit union indicating that if you bounce a check or two every now and then you don’t need to worry; the institution will pay it and you’ll be charged their standard NSF fee.