When you sign up with a bank to create an account, they’ll almost always offer you something they refer to as “overdraft protection.” When they explain it to you, they’re going to make it sound like this is something that works to your benefit by preventing overdrafts.
Unfortunately, the things they tell you, and the way they describe the service, can be very misleading. The truth is, overdraft protection can actually incur more fees, more often, if you opt in. This does depend on you, your income, and your finances.
In some cases, if your income is low, it might be better not to opt into overdraft protection. In any case, it’s important to understand exactly what it means and what it does.
An “overdraft” is basically the equivalent of writing a “bad check,” though today, it usually happens during debit card transactions instead. In the vast majority of cases, it’s completely unintentional.
Sometimes you forget to check the exact amount you have in your account. Sometimes a payment comes in late, or a check doesn’t go through as quickly as you’d expected. Also, financial emergencies like car problems happen sometimes, and you have to get it taken care of immediately.
You will overdraft if you use your debit card (or a check) to pay for something that costs more than you had in the account.
“Overdraft protection” means that the bank will approve the transaction in question, rather than denying it because you don’t have the funds. In some cases, this is true only up to a certain amount. Either way, they’ve basically fronted you money you don’t have.
Overdraft protection does exist for a reason. In some cases, like our emergency car repairs example, it might be better that you were able to make the transaction at the time.
The problem is, banks charge extra fees when this happens. Rather than denying the transaction, they’ll let it through and debit the account. But not only are you now in the red for the amount extra you spent, you also owe extra fees, often substantially more than the actual amount of the overdraft itself.
Due to some legal factors, banks can get away with a lot as far as fees go, sometimes to the point of being able to dodge certain usury laws. Part of the reason is that the overdraft coverage is conceptualized as being essentially a kind of loan.
You may be at risk of overdrawing by $10, then owing the bank $45. This can and does happen, so it’s important to know your bank’s exact terms.
Banks offer different varieties of overdraft protection options, which can work differently from one another.
One option is “linked accounts.” Your debit account links to your savings account. If you overdraw from debit, your savings will cover it — if you have them. If there’s nothing in the account it draws from, you’ll still be charged extra.
Another option basically amounts to a line of credit. Overdrawing is akin to using a credit card — the drawback being that you’ll pay high interest, as you would for a credit card cash advance.
Some banks also offer an “ad hoc” option, where the bank uses its own discretion when making a decision about what will be done about your overdraft. An overdraft may be denied if it’s a frequent occurrence and you have a record of having it happen.
If you don’t overdraft often or excessively, they may opt to just let it slide — for a fee. The fee is often a lot more than the amount of the actual overdraft.
They might not tell you outright when you sign up, but banks do allow you to opt out of overdraft protection. If you think it might be a serious problem in the future, you may want to just have transactions denied.
Other than that, you can protect yourself by keeping a close eye on your balance — which is fortunately pretty easy these days due to online banking. You can set up text or email alerts if your balance goes below a certain threshold. It’s also a good idea to check the exact balance before you try to buy something, particularly if you’re not sure how much is left from your last paycheck.
If you’re short of cash and you’re trying to get a loan, try calling The Net Lender. You can get your loan almost immediately, which will save you an enormous amount of time waiting at the bank. Call today to see if your car qualifies you for a car title loan.