Overdraft Protection
Candlefocus EditorWhen an overdraft occurs, a customer can choose either to allow the transaction to be processed and pay the bank a fee or to decline the transaction. If the customer chooses to decline the transaction, the bank may still charge a decline fee. If the customer wishes to avoid the overdraft fee, the bank will transfer money into the customer’s checking account from other accounts linked with the customer’s bank.
The two most common options banks offer for overdraft protection are linked savings accounts or lines of credit. Linked savings accounts allow customers to automatically transfer money from the customer’s savings account if the customer’s checking account falls below zero. The drawback of this option is that the customer may face an insufficient funds fee for the amount that must be transferred in order to cover the overdraft transaction.
Banks also offer an overdraft protection line of credit to link with a checking account. An overdraft protection line of credit is similar to an unsecured personal loan and the customer will typically get a balance, an interest rate and a credit limit. The maximum credit limit, depending on the bank, can range from $250 all the way up to $5,000 or higher.
The advantage of an overdraft protection line of credit is that it can save customers from having to pay overdraft fees, as well as the decline fee, if the customer chooses to decline the overdraft transaction. The disadvantage of this option is that customers will have to pay an annual fee to keep the account open, as well as an interest rate for any balances that are carried over.
Overall, overdraft protection provides peace of mind for many consumers who are worried about overdrafts causing problems in their checking accounts. Although there are fees and/or interest associated with overdraft protection, customers do have options when it comes to which type of overdraft protection they choose. In addition, by understanding their bank’s overdraft policies and monitoring their account, customers can potentially avoid paying certain overdraft fees.