If you make a payment that exceeds the balance in your checking account, that is an overdraft. Depending on your arrangements with the bank, you may be have a fee imposed, or the draft may be rejected by the bank. Overdraft protection is designed to protect you from these issues. Here’s a look at the specifics.
What Is Overdraft Protection?
Traditionally, overdraft protection is any program that helps you avoid overdrawing your checking account. That may include connecting your checking account to a savings account or a line of credit. To explain, imagine you draft a check to the utility company, but you get distracted and forget to write down the check in your records. As a result, when the utility company presents the check, your account doesn’t have sufficient funds to cover it. Luckily, however, you’ve connected your savings account to your checking account. So, the bank simply initiates a transfer for you and that covers the payment. Note that there is sometimes a fee for these types of transfers, but it is often smaller than an overdraft charge.
However, that is not the only overdraft protection definition. In 2010, a new overdraft protection rule came into effect. This rule stipulates that consumers can decide whether or not they want to opt into their bank’s overdraft protection plans.
What Happens If You Opt into Overdraft Protection?
The overdraft protection rule relates to ATM and debit card transactions. If you opt in, the bank accepts the transaction even if it exceeds your balance, but you pay a fee. At the time of writing, the average fee for this convenience is $33.84. To explain, imagine you’re at line in the grocery store. You have $100 worth of groceries, but your account only has $20. If you opted in, the bank accepts your debit card but tacks on a fee.
That said, opting in doesn’t necessarily ensure that all transactions will be accepted. The majority of banks have limits on how far they allow their customers to overdraw their accounts. They may also have additional requirements such as staying in good standing with loans or having your account open a certain amount of time, and if you don’t meet these requirements, the transaction may be denied even if you opted in to the plan.
What If You Don’t Opt In?
If you don’t opt into your bank’s overdraft protection plan, debit and ATM transactions will simply be denied if you don’t have enough money in your account. This can help you to avoid fees, but you may sacrifice some convenience.
Legally, if you decide not to opt into a bank’s overdraft protection plan, the bank still has to offer you the same features. A bank can’t offer better checking account features to someone who opts in, while withholding them from customers who don’t opt in.
What About Check or ACH Overdrafts?
Generally, when you opt into an overdraft protection plan, that only covers debit and ATM transactions. The bank may have other rules related to checks, ACH transfers, or electronic payments. Make sure that you understand what your bank is likely to do if you overdraw your account with one of these payment methods. For instance, a bank may accept a check and assess a fee whether you have opted in or not, or the bank may return the check and apply a return check fee.
What Should You Consider When Looking at Overdraft Protection?
When comparing different banks, you may want to pay attention to their overdraft policies and make sure they work for you. Some of the elements you may want to look at include the following:
- The availability of a cushion — A $5 cushion, for instance, can help you avoid fees or rejections when you only overdraw your account by a little bit.
- The maximum number of fees assessed per day — Ideally, you don’t want to get in a position where a small error creates a cascade of fees.
- Extended overdraft fees — Most banks charge a fee if your account is overdrawn for more than a certain number of days.
- Reduced fees for minors and seniors — Some banks offer reduced fees for people under 18 or over 65.
- Options such as lines of credit or savings account — These products can help to cover overdrafts.
- Alerts — When banks offer alerts, you get notified when your balance falls below certain levels.
At Blue Hills Bank, we offer a variety of tools to help you avoid overdrafts. You can link your savings account to your checking account or apply for a line of credit. Of course, you can also opt into the overdraft protection plan so that you don’t have to worry about purchases being denied. To learn more about the options, contact us today.