Overdraft Protection, Limits, and Types

Overdraft protection is a feature of checking accounts that allows people to write checks for sums that exceed the balance. This feature is available to bank clients who have a line of credit. Otherwise, financial institutions charge fees for bouncing checks.

Benefits of Using It

The main advantage of using this feature is that borrowers gain access to quick cash. While the interest rate is very high, bounced check fees are even higher. Some financial institutions assess fees if the account balance is negative, but they are still less expensive compared to bounced check fees. In addition to allowing people to save money, overdraft protection has a positive effect on the credit score. Bounced checks may affect the borrower’s credit score, which limits his access to inexpensive forms of credit. Overdraft protection also helps people to avoid embarrassment and thus protects their reputation and creditworthiness. It is a convenient feature that many businesses and individual customers use. Borrowers can rest assured that their balance will be paid off in case the payment exceeds the line of credit. Thus companies continue with their normal operations when money is not sufficient.

Limits of Overdraft Protection

Banks set limits on the amount of money covered. Those who often write checks that exceed the balance risk having their protection revoked. Having extra money available makes it easier to overextend oneself. Some people are also confused because bank accounts often show overdraft funds, along with the available balance. Those who exceed the limit are then charged interest and penalty fees.

While many banks advertise overdraft protection as a free service, it is free as long as you don’t use it. The good news is that financial institutions don’t charge high fees for money borrowed through this feature. At the same time, the service is free-of-charge only if borrowers never access it.

Types of Overdraft Protection

Financial institutions offer different types of protection plans. Customers can choose from savings overdrafts, lines of credit, and courtesy pay. A savings overdraft can be used to transfer money from the customer’s savings account to pay off debts. Some banks charge a fee for the service while others offer it free-of-charge. This is one of the simplest types. Here the customer’s savings account is linked to his checking account. If the money in the checking account is depleted, the bank transfers funds from the client’s savings account.

Another option is overdraft protection in the form of a personal loan. The outstanding balance is covered by using funds from the borrower’s line of credit. Banks assess interest charges, and it is important to inquire about the interest you owe if you use this feature. Courtesy pay is another form of overdraft protection, which is offered to customers that meet certain criteria. If the two other options are not available (have been exhausted), this features saves borrowers money on returned items. The feature is offered for overdrafts that are created by using electronic means, ATM withdrawals, in-person withdrawals, checks, and other means. In many cases, financial institutions require payment within a period of 20 days.

Bounce protection is one feature that financial institutions use at their discretion. They offer it to creditworthy borrowers who have never overdrawn. The problem with this feature is that banks charge high fees. And there is one downside to all forms of overdraft protection. Because it serves as a safety net, many people overspend, forgetting that it should be used in emergency situations.

Questions to Ask Your Bank

Ask your financial institution whether you will pay a flat fee or interest charges. Inquire whether you can link a credit card or a savings account to your checking account. Ask whether a savings overdraft or a line of credit is more advantageous and whether you can link more than one account for protection. Another question to ask is whether you can change the account that is linked. Finally, ask the bank whether the service is offered for ATM withdrawals and if you are still subject to NSF fees.

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