Definition
Overdraft protection is a service that allows for funds either from a linked account or from a bank loan are used to cover charges or withdrawals that exceed an account’s balance.
Analysis
Overdraft protection is a valuable service that can help consumers avoid embarassing bounced checks or blocked debit card transactions. When a consumer links to another depository account such as a savings account, they do not have to monitor their account balance as closely. This is especially useful when a healthy savings account balance is maintained.
Most large banks automatically provide overdraft protection that uses short term bank loans whenever an account balance falls below zero. This is true when a consumer fails to link another account to serve as an overdraft protection account. Although this can save bounced check fees from merchants, it also comes at substantial cost.
Most banks are now charging in excess of $30 per overdraft fee. These loans are usually only valid for up to 7 or 10 days, in which the bank reserves the right to charge another fee if the balance is not restored. Banks also may rearrange the order of charges so that they can charge the maximum number of overdraft fees.
Consumers that routinely allow their checking account balances to fall below $100 should strongly consider linking a savings account for overdraft protection purposes. It can help avoid numerous overdraft fees whenever an account dips below zero.
