Anyone with a bank account has most likely heard of overdraft protection — and most of these people have dealt with it as well. Overdraft protection can come in handy at times, like when you have to pay for something as soon as possible but you lack the necessary funds in your account. However, it’s not all sunshine and roses because nothing comes without pitfalls.
What Is Overdraft Protection?
Overdraft protection funds a bank account that has been overdrawn. In other words, it is a protection against having your transaction declined. Although there are usually hefty fees to pay whenever the account is overdrawn, you can at least rest assured that your check will go through in case of a big withdrawal.
How Does It Work?
When it comes to overdraft protection, there are three types, all of which transfer money to your overdrawn checking account but have different fees:
1. Overdraft Protection Line of Credit
How much you overdraw is subject to a variable interest and a fee.
If you overdraw from your bank account, the line of credit sends some funds to cover the amount that was overdrawn while the fees are charged too. How much you overdraw is subject to a variable interest and a fee.
2. Link Your Checking Account to a Money Market Account, Secondary Checking, Eligible Savings, or Line of Credit Like a Credit Card
If you find yourself in the situation where your account is overdrawn, there will be cash transferred from the account you linked. There may also be an overdraft protection fee, but it’s usually smaller.
3. Opting in for Overdraft Coverage for One-Time Debit Card and ATM Transactions
If you decide to opt for this version, you allow the bank to pay the overdrafts from one-time debit card and ATM transactions. However, the downfall is that banks usually charge very high fees for this service.
How Much Does It Cost?
As you can expect, this service isn’t offered for free. Usually fees are charged in order to prevent people from abusing the service, but it’s also a way to provide the bank with some revenue.
Not all overdraft protection charges are the same, but most big banks get away with massive charges. For example, Bank of America banking fees can really burn a hole in your wallet.
Usually fees are charged in order to prevent people from abusing the service, but it’s also a way to provide the bank with some revenue.
Interest costs may be included as well, and depending on the plan for your overdraft protection, the amount of cash of the plan might be considered a loan. If this is the case, you should be aware that the bank will charge interest until you pay it off. At the same time, it’s a much cheaper option than paying the flat fee for each overdraft.
Furthermore, if the overdraft protection it used too often, the bank might use it as a strike against you and drive down your credit score. It depends on the overdraft protection you use, but make sure to only use it for absolute emergencies.
Overdraft protection can be really helpful in certain situations. At the same time, it has pitfalls, so it’s better to be aware of them before you sign up for this popular banking feature!