Overdraft protection is a bank service that covers checking accounts from costly overdrafts. The option is ideal for transactions that exceed available funds but are less than the maximum coverage limit.
How Does Overdraft Protection Work?
When a purchase costs more than a customer can afford, their account balance may incur expenses due to insufficient funds. Overdraft Protection ensures that when this occurs, the account processes the charge successfully, despite leaving a negative balance.
Transactions may go through if the account is covered with Overdraft Protection. Without enough funds to cover an overdraft, the bank accepts the reimbursement from a linked account. Without a linked account, the balance could be negative until the customer pays what they owe. Three common types of overdraft protections are available for account holders who want various options.
Bank-Issued Credit Card
Customers can pay overdraft costs with a linked credit card if their bank allows the option. However, customers must use a card issued by the same bank where they maintain their accounts. Since interest fees vary and can increase an overdraft amount, it would be best to fund a balance during a particular pay period to avoid additional expenses.
Line of Credit
Some banks offer customers the option to cover overdrafts with a line of credit. Interest fees are also typical when using this method, but customers can resolve a penalty quickly by borrowing from creditors. Penalties do not affect credit scores unless account overdrafts remain unresolved and a debt collector handles the issue.
Linked Internal Accounts
Funds are transferred from a standard savings account to a checking account, reimbursing the balance during an overdraft. Additionally, some banks charge a small transfer fee per internal transaction.
How to Know if You Have Overdraft Protection
Whether or not you have overdraft protection will depend on your bank and the type of account you have, so it’s a good idea to read the fine print of any accounts you have and see what your specifics are. Amerant Bank’s CoverMe Program, for instance, enrolls new customers automatically after they open a checking or money market account. It protects accounts from bounced checks and failed purchase attempts, even if a balance doesn’t have enough money to pay the withdrawal up to a $100 limit. (superscript 1 go to CoverMe page to get fine print).
Successful inbound transactions are unlikely if a customer has insufficient funds or fails to prevent a penalty. If additional purchases exceed the $100 coverage limit, several charges may occur within one business day. Therefore, it would help if customers agree to receive notifications by activating the low balance alert feature for fund tracking and debit or credit activity.
Benefits of Overdraft Protection
Overdraft protection has two practical benefits that could help motivate customers to use the service. These features can save money while minimizing negative balances and keeping accounts in good standing.
Set up Low Balance Alerts
Bank customers may want to preserve a balance that exceeds a specific minimum threshold. An automated alert is activated if funds drop below a limit. Account holders must also consider having enough money available to prevent overdrafts and additional costs.
Transfer Money Between Linked Accounts
Connecting a savings account to a checking account is one of the most practical ways to avoid potential overdrafts. Internal linking is a reliable protective measure when funds are too low to cover a transaction. When a transfer to a checking account occurs, it resolves the overdraft and negative balance.
Non-sufficient Funds vs Overdraft Protection
It is easy to differentiate between non-sufficient funds and overdraft protection. Non-sufficient funds occurs when a bank returns an inbound transaction as unpaid. Overdraft Protection pays the inbound transaction and may or may not charge a fee depending on the bank. Non-sufficient funds typically have fees associated with the institution as well as the payee. It is important to know the difference between the two, as non-sufficient funds can be very costly to an account holder.
How to Avoid Overdraft Fees
Overdraft fees can impact finances if a bank customer cannot pay the owed amount. While penalty expenses are usually small, they can be an obstacle if money is unavailable. Losing track while spending is easy, but it can be risky if customers check their balances only occasionally. Several standard techniques can help prevent accounts from experiencing a shortfall.
Resolve an Overdraft Immediately
Overdraft charges are avoidable with regular monitoring to guarantee funds remain below the limit and above the minimum balance. Unfortunately, some customers allow the issue to progress instead of handling it quickly after it occurs. Fees accumulate until the overdraft can reach an outstanding amount too expensive to pay in full. Therefore, the sooner customers cover an overspent account, the more likely they will avoid a penalty.
What happens if an account remains in overdraft?
If an account remains in overdraft for too long (typically 5 or more business days), banks may report the account and individual to a reporting agency. Agencies like Chex Systems usually hold negative account information up to a time period that is legally allowed. If account holders are reported in Chex Systems, it may impact their ability to open new accounts at banks and other financial institutions. Because of this, it is important to pay overdrafts and treat them similar to credit accounts with payment due dates.
Track Account Balances
Tracking funds is crucial to maintain a specific amount that covers excessive transactions. Bank account holders may have to pay a fee for purchases as low as $20, which can incur debit or interest fees if they use a credit card as a preferred payment method. Therefore, overdraft protection is a sensible option for customers who make small transactions habitually.
Decline Overdraft Services
Account holders aren’t required to use an overdraft protection program if they prefer to monitor their spending and other banking activities themselves. They can decline services without facing penalties or losing privileges by contacting their bank. The bank will end overdraft protection promptly in response to the opt-out requests via phone or a mobile app.
Find a Bank That Offers Efficient Overdraft Protection
Not all banks have an overdraft protection program their customers can rely on to keep their accounts from going into a negative balance. Therefore, finding a financial institution that offers an ideal preventive service with various coverage funding methods would be best. They also don’t charge an expensive fee per overdraft and only deduct an amount for additional transactions over a set limit.
Take Advantage of Grace Periods
Some banks offer grace periods that allow customers at least one or two days to cover an account instead of charging an overdraft fee immediately. For example, they may extend deadlines for customers to regain their positive status. If a customer fails to pay by the end of the period, the bank may charge fees for additional transactions.
Talk to a Bank Representative
Some customers are uncertain how to avoid inconvenient charges when spending more than they can afford. A representative can advise on methods to use overdraft protection without compromising funds or account status.
Is It a Good Idea to Have Overdraft Protection?
Overdraft protection is ideal for customers who prefer the service or need help avoiding negative balances due to insufficient funds. It can be a resourceful tool to prevent recurring costly overdraft fees. Whether the service is valuable or necessary depends on an account holder’s needs and preferences.
Account holders considering overdraft protection must read their bank’s guidelines before they opt-in, ensuring they get the most out of the services and features. It would also help to consider the essential benefits of maintaining coverage that protects against potential fees. Learn more at amerantbank.com and follow Amerant on Facebook, Twitter, Instagram, and LinkedIn @AmerantBank.
