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What is Overdraft Protection?

Nov 1, 2007
In simple terms, overdraft protection helps you should you write a check and not have the funds in your account to cover that check. That is the simple explanation, but there is often more to it than that. This article looks at some of the common issues associated with overdraft protection.

Normally, when you write a check that bounces, the check is returned unpaid to the company or person who deposited it. Fees are usually charged by the party who returned the check and you have to pay those fees. In addition to that fee your bank may also assess a service charge to you for having written a bad check. These fees can add up quickly, and even a small check written for a few dollars can suddenly cost you much more by the time you pay all of these fees and service charges.

Sometimes, if the overdrawn amount is small, and you have been with your bank for a long time, they may go ahead and pay your check, but they will still assess a fee for payment. These fees can run from a few dollars to up to thirty dollars or more, per check. This is where overdraft protection comes in handy.

Overdraft protection will it is used to cover a check for you is not free in most cases, but it will normally cost much less than bouncing a check. First, because the bank will pay the check (up to a certain amount) the person you wrote the check to will get the funds and not have cause to charge you a fee. The bank for its efforts may charge you a smaller fee for honoring the check but, again, this is usually less than a regular service charge for a dishonored check.

Consumers should understand that even with overdraft protection there is a limit to how much the bank will carry in overdrafts for you. Once you hit that limit the bank will begin to return checks as if you had no overdraft protection at all.

It is also important to understand that if your account is in the negative (meaning you have a debt to the bank because of overdrafts) any money you put into the account will go towards paying that negative off. In other words, if you are $200 below zero and you put in $100 of new funds, your account will show a minus $100.

Most banks have a set amount of time that we will allow you to get the money back into your account. Thirty days is a normal time frame used by many banks before they take action. If you do not replace the money within that time the bank may begin to charge interest.

Overdraft protection is a very useful tool to have but it should be used only in emergencies. Its purpose is to protect you from higher fees and service charges, and in that role it does a good job. It should not be seen as a means of quick cash or as a loan vehicle, which many people treat it as. Overdraft protection is a privilege that your bank extends to you and as such it can be withdrawn if it is abused.
About the Author
Peter Kenny is a writer for The Thrifty Scot, please visit us at Compare Loans and Credit Card
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