When you use a debit card, make an electronic transfer, or write a check without having the necessary funds in your account to cover the transaction, you could be slapped with hefty fees. If your bank decides to allow the transaction through, and temporarily covers the payment, they will likely charge you an overdraft fee. If your bank declines the payment and blocks it from being processed, they could charge you a nonsufficient funds fee. According to CNET.com, the average fee for a single overdraft is currently $29.80, while the average nonsufficient funds fee is $34.00.
Overdraft fees and nonsufficient funds fees can add up quickly. Plus, having insufficient funds in your account puts you at risk of late payments and bounced checks, and could even make it difficult for you to open a bank account in the future. For this reason, many people choose to protect themselves against accidental overdrafts and insufficient account balances. Let’s take a closer look at how this can be done.
Understanding Overdraft Protection
Simply put, overdraft protection is a way to help avoid rejected payments and costly fees stemming from insufficient funds. It typically involves designating an alternative back-up account that can be used to cover any overdrafts. For example, you might link your checking account to a savings account you have at the same financial institution. Then, if you attempt to make a payment from your checking account, but don’t have enough funds in the account to cover the transaction, the funds will be automatically moved over from your savings account. In this case, you would avoid an overdraft fee, but it’s important to note that some banks might still charge you an overdraft transfer fee, or overdraft protection fee, for this service. While this type of fee is generally significantly less than an overdraft fee or nonsufficient funds fee (MyBankTracker.com estimates that the typical fee for an overdraft protection transfer is between $10 and $12.50), it’s important to check with your bank to ensure you understand all potential fees before setting up overdraft protection.
Some advantages to overdraft protection include:
- Allows transactions to go through. Overdraft protection prevents your bank from rejecting charges that exceed the balance in your checking account.
- Can be less expensive than overdraft fees or nonsufficient funds fees. While overdraft protection is not always free, it can be significantly less expensive than overdraft and nonsufficient funds fees. Overdraft fees and nonsufficient funds fees are typically charged on a per-transaction basis, so you could be slapped with multiple charges in the same day if you don’t have overdraft protection in place.
- Can prevent additional fees. Without overdraft protection, you run the risk of having your payment declined by the bank. If a payment doesn’t go through, you could potentially face additional charges from the vendor or merchant you were trying to pay. If insufficient funds cause one of your checks to bounce, you could also be slapped with a returned payment fee by your bank.
Some things to keep in mind:
- You may be charged for a back-up account at another bank. Depending on which type of account you link to as the back-up, you might have an additional charge from that account issuer as well. For example, if you select a credit card to link to your checking account as overdraft protection, the card issuer treats the amount used to cover the overdraft as a cash advance, meaning it may be subject to a higher interest rate than your typical credit card purchases.
- Not all banks allow overdraft protection. Banks are not required to offer overdraft protection, and those that do might not allow you to link to an external account. It’s a good idea to check with your bank to see what kinds of options are available to you.
- Don’t rely on overdraft protection. Ideally, you should only use overdraft protection in an emergency, or when you’ve made a genuine mistake with overestimating your available account balance. Overdraft protection is not something you should rely on every day, as doing so could become extremely costly, and could result in your account being closed. Banks typically reserve the right to close your account if they find that you’re abusing overdraft protection.
- Overdraft protection is not the same as overdraft privilege. You may have heard the term “overdraft privilege” and assumed it meant the same thing as “overdraft protection”. However, the terms do differ. While overdraft protection typically refers to linking an account to a backup account to cover overdrafts, overdraft privilege is essentially when the bank allows you to overdraw your account up to a certain amount and still have the transactions paid. With overdraft privilege, the bank will still typically charge you an overdraft fee for each overdraft that they allow through.
Overdraft protection can be a great tool to help you avoid costly fees stemming from low account balances, but it should be used responsibly. Checking your account balance on a regular basis and setting up low-balance notifications via online banking or your bank’s mobile app can help you avoid overdrafts altogether.
For more tips on smart money management, visit https://www.bankfive.com/blogs?f=Money+Management.