Understanding Overdraft Protection

overdraft protection

Overdraft fees on checking accounts could cost you big bucks. These fees are sneaky, and you won't believe how they can rack up over-night.

Despite all the federal rules implemented in 2010, banks are still finding a way to pull dollars from fee-based revenue. The lack of consumer awareness of overdraft protection mechanisms is the leading cause of fees, so let's see how we can avoid them.

How do overdrafts happen on your checking account?

An overdraft on your account can occur when:

  • You write a check.
  • You use your debit card.
  • You set up a recurring automatic payment through bill payment.
    …and you don't have enough funds to pay for those….. OUCH!

At that point, your bank will decide if they will pay any of these transactions. Here is the catch. Regardless if they pay them or not, you will assess a non-sufficient transaction fee. This fee is typically around $37.00 per transaction.

So if you have four transactions that came in at the same time, this could cause $148.00 in bank fees. Also, keep in mind the merchant may also charge you a fee if the transactions are not paid.

How to deal with overdrafts:

Avoiding overdraft fees is the best way to protect your hard-earned money. Your bank can help you set up overdraft protection, but they won't offer it many times if you don't ask about it.

Many banks offer a courtesy refund on overdrafts when an overdraft hits your account. Reach out to your bank and discuss the charge. They might be able to help waive some of the fees for you.

You have the right to “opt-in” or “opt-out” from overdrafts when you're using your debit card. Opt-in means you agreed to have your bank pay for every debit card transaction and pay the fees associated with those. Opt-out means you are authorizing the bank to deny a debit card transaction that could result in a negative balance.

Ask your bank how to avoid the overdraft moving forward. Many banks offer overdraft lines of credit.

Types of Overdraft Fees

Overdrafts Type$$$
Don't overdraw$0 – cost to you
Savings account sweepSmall transfer fee – it could be $5.00
Overdraft Line of CreditCould have an annual fee along with daily interest
Bank Overdraft ServicesOverdraft fee plus additional fees if you stay in the negative for multiple days
Rejected transaction/Bounced checkOverdraft fee, merchant bounced check fee, additional fees from the bank

How to manage your overdraft protection:

Avoid using your overdraft source when possible – it could be costly if used often.

When you overdraw your account, get the money back into the account as soon as possible to avoid further fees.

Keep up with your bank account activities by utilizing online banking and alerts.

Know your bank's funds availability policies.

Do overdraft fees hurt your credit?

Overdrafts do not and cannot directly hurt your credit or reduce your credit score. However, if an account becomes in “charged off” status, the bank will turn your account to a collections agency. This can get reported on your credit report.

Once the charged-off account has been reported, this will adversely affect your ability to open accounts at any bank or borrow a loan. Banks utilize a system called “ChexSystems,” which provide any bank information about charged-off accounts. They may share your name, the name of the bank that you owe money to, and the amount and the date the account became charged off.

A majority of banks will have a rule that you have to satisfy the outstanding balance on your ChexSystem before you can establish any bank account. At this point, you must present a letter of satisfaction to your bank.

In summary, it is important to realize that overdraft fees can be a very costly mistake. Avoid these bank fees so that you can maximize your savings. The best overdraft fee is the one you don't pay for, so be aware of your spending habits, learn about your bank policies. Bottom line, don't spend more money than what you have in your bank account!

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