Overdraft protection is a feature offered by most banks that will protect a customer from overdrawing their account and incurring NSF fees. Typically, the customer will need to link another account to their checking account, this way the overdrawn funds will come from the additional account, preventing their checking account from dropping below zero.
What Is Overdraft Protection?
Overdraft protection ensures that if you were to withdraw an amount that is larger than that available on your checking account or debit card, the transaction or withdrawal in question would still be completed. Overdraft protection prevents a borrower’s account from being overdrawn and incurring additional fees.
How Does Overdraft Protection Work?
Overdraft protection happens in two ways; once you withdraw more money than you have in your checking account, you will either be issued an overdraft line of credit or you’ll be using funds from a linked account (known as overdraft transfer protection).
If it weren’t for overdraft protection, you’d likely stumble into multiple issues regarding your transaction. You may even need to return the purchased goods and pay hefty fees which merchants used to protect themselves from these situations (on top of the product price). In addition, you’d also have to pay non-sufficient funds fees for making an overdraft without protection. If no overdraft protection is in place and multiple such payments (over balance) take place, you need to pay an NSF fee for every single one of them. You can avoid this by using an overdraft line of credit or overdraft transfer protection.
What is an Overdraft Line of Credit?
Overdraft line of credit is one way to use overdraft protection. Once you sign up and the bank asserts your creditworthiness, you’ll be eligible for what is essentially a loan, issued once you make an overdraft. As with any other loan, an interest rate will apply and you also must pay an overdraft fee averaging around $35, but the transaction, withdrawal or check will be cleared without problems. In addition, any other transaction that would have your balance fall below zero will be completed as long as you stay within the set overdraft credit limit.
What is Overdraft Transfer Protection?
Another way to use overdraft protection is by linking to another account, which is referred to as overdraft transfer protection. The source in question may be another checking or savings account. When activated, overdraft protection will use this account to complete the transaction.
You can link your account with another credit card or a dedicated line of credit, which will then be subject to their own interest rate, terms and conditions. Linking your checking account to a credit card won’t lower your credit score, as this may only sometimes happen with large transactions which increase your credit utilization percentage. If used, with overdraft protection you’ll still be able to complete the payment and keep an excellent credit score.
Is Overdraft Protection Worth It?
Some banks charge flat fees for their service of overdraft protection. Overdraft lines of credit bare standard interest rates. In addition, linking to another credit card will be treated as a cash advance by the issuing company, which results in additional usage costs. However, overdraft protection saves you from payment issues with costly penalties and annoying bouncing checks.
With payments that would cause your balance to fall below zero, overdraft protection ensures that the transactions get completed. You won’t be charged the non-sufficient funds fee which may accumulate if you forget your balance is close to zero and make several purchases in a short period. Situations such as these can develop overnight without you even noticing them. Some merchants may even have strict policies which require paying additional fees for attempting to purchase their goods with insufficient funds.
If you have issued any checks amounting to more than stated on your balance sheet, overdraft protection will activate to cover the shortage. Overdraft protection can be very beneficial. Stay within your overdraft limits to avoid extra costs. Before opting for your credit card instead of the overdraft protection in emergency situations, look at the full cost breakdown of both options.
How do You Sign Up for Overdraft Protection?
Overdraft protection is no longer mandatory. To ensure your account is protected from being overdrawn, you’ll want to opt in for overdraft protection offered by your financial institution of choice. If you’re setting up an overdraft line of credit, the issuer will verify your credit score. After that, the granted funds should appear on your balance. If your setup includes linking to another account, make sure that your backup choice has sufficient funds.
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