Overdraft Protection vs. Standard Overdraft Services
Banks offer a number of products and services in the name of “convenience.” Some of these services include overdraft protection and standard overdraft services. These services mean that when you overdraw your account, your transaction is not denied. So, instead of ending up embarrassed because you can’t make a purchase with your debit card, the transaction goes through – and you are charged a fee. Here are some of the key differences between overdraft protection and standard overdraft services:
With overdraft protection, you actually ask for the ability to overdraw your account. In many cases, overdraft protection actually amounts to receiving a line of credit. Before you are approved, the bank might run a credit check to see whether you have an adequate score to qualify for the overdraft program. Opening this line of credit can also affect your credit score going forward. When you do overdraw your account, you will be charged interest on the amount until it is paid back. In some instances you might have to pay a transaction fee on top of it. However, the transaction fee is often between five and ten dollars. There might also be a limit on how much you can “borrow” to cover overdrafts. Be sure to understand what limits are placed on your overdraft.
Depending on your bank, overdraft protection may also come with an annual fee that you must pay – even if you do not overdraw your account. Some accounts will allow you link your checking account with another account, a savings account or a credit card account, so that if you overdraw, money is automatically transferred between accounts in order to make up the difference. There might be a transaction fee for this service, though.
Before applying for overdraft protection, it is a good idea to find out exactly what the program entails. Programs vary according to financial institution, and you should know what fees are charged, and when they are charged. You should also have an understanding of whether or not your overdraft protection is a line of credit, since that might increase what you owe.
Standard Overdraft Services
Even if you do not have overdraft protection, you might have some access to overdraft services. Many financial institutions have what are known as standard overdraft services. These services allow for some transactions to go through, even if you go over your limit and do not have overdraft protection. This might include allowing debt card transactions to go through, as well as honoring bounced checks and automatic debits. Standard overdraft services even cover ATM transactions, so you can still withdraw money from an machine – even if you do not have the money in your account. However, at some point, the standard overdraft services hit their limit, and your transaction over the amount you owe will be denied. Standard overdraft services often come with relatively steep fees; some financial institutions charge up to $45 when you go over your limit with standard overdraft services. Some financial institutions have also been known to process debits in order from highest to lowest in order to maximize the number of insufficient funds fees.
Standard overdraft services can provide a level of convenience to those who are concerned about having their debit transactions denied if a mistake is made with an account, but who do not overdraw their account often enough to warrant overdraft protection.
New Opt-In Rules for Standard Overdraft Services
Last year, the Federal Reserve made some new rules about standard overdraft services and the decision was made to require financial institutions to have customers opt in. The rules took effect earlier this year, on July 1, 2010 for new accounts and August 15, 2010 for existing accounts. You probably saw a notification from your financial institution during the summer asking you if you wanted to opt-in to these services. If you did not opt in, you automatically no longer have access to the standard overdraft services.
If you did not actively agree to standard overdraft services, your debit transactions and ATM transactions will be denied if you do not have adequate funds to cover. While this might be inconvenient, it does force you to be more careful about watching your account. And it prevents you from being charged overdraft fees related to your debit card or ATM transactions.
Note, though, that failure to opt in does not mean all overdraft transactions will be denied. The new rules only apply to every day debit transactions and ATM transactions. Checks may still be honored, and automatic debits through the ACH system will still be honored. This is because many consumers recognize that important things like bills are paid with checks and automatic debit. This way, customers can limit their fees from every day debit transactions, but still ensure that their mortgage payments and utility payments go through. As you might imagine, hefty transaction fees are likely to apply when ACH and checks go over the limit. If you did not opt in to receive standard overdraft services, and the financial institution lets a debit other than a check or ACH transaction go through even though you do not have adequate funds, you cannot be charged a fee.
The best way to avoid overdraft fees, of course, is to avoid overdrafts. Use some sort of system to keep track of your expenses. Personal finance software can help you keep up with what you are spending, and what is in your account. Web and mobile applications can help you link to your bank accounts so that you always know what is exactly in there.
A budget can also help. Having a plan for your money can help you avoid overspending your account. When you know what you have, and where it is going, you are less likely to overdraw your account and end up with overdraft fees.
If you are concerned about mistakes, though, and do not want the inconvenience of having a transaction denied, opting in to standard overdraft services might not be a bad idea. You will have to pay fees when you overdraw your account, but at least your transactions will go through. Carefully consider your options before you decide on overdraft protection, standard overdraft services, or to forgo these services altogether.
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