How Does Overdraft Protection Work?

Bouncing a check doesn’t make you a bad person. It usually occurs as a result of a miscalculation or a scheduled deposit being credited later than anticipated. And with the use of debit cards, we are even more prone to such mistakes due to poor recordkeeping.

Most banks offer overdraft protection these days. This service can save you money in overdraft fees and save you the embarrassment and fees associated with having a check bounce or having a debit card transaction denied. But in order to get the most out of overdraft protection, it’s important to understand what it is, what it isn’t, and how much it will cost you.

Here is some banking advice on how overdraft protection works.

• When you write a check or make a debit card purchase that exceeds the amount you have on deposit, the bank covers the difference for you. This leaves you with a negative balance in your checking account. However, you are not charged an overdraft fee.
• The difference between the amount of the check or debit and the amount in your account is charged to a line of credit. The amount of this credit line may be anywhere from a few hundred to a thousand dollars, or perhaps more. This amount is determined by your bank’s policies and your credit history. If you have a sufficient line of credit, you may be able to write several checks even after you’ve depleted the funds in your account.
• You’re not required to make separate payments on the amount charged to your line of credit. It is paid when deposits are made to your account. If the deposit is more than the amount borrowed, the remainder goes into your checking account. However, some banks require customers to make a minimum deposit each month that they have an outstanding balance.
• An overdraft line of credit is not a free ride. Interest is charged on the amount borrowed from the time it is used until it is repaid. You may also have to pay an annual fee for the line of credit. But even with these fees, overdraft protection can save you money if you overdraw more than a couple of times a year.
• Your overdraft line of credit can be taken away if you do not use it wisely. If you have a constant negative balance for several months, don’t make the minimum required deposits on time or exceed your credit limit, the bank can place a hold on your account or even close it. Overdraft protection is meant to be a safety net, not a long-term loan.

The best way to avoid overdraft fees is to avoid overdrafts altogether. But if you find that you’re overdrawing your account due to oversights, overdraft protection could give you peace of mind and save you money.