Everything You Need To Know About Overdraft Protection

Everything You Need To Know About Overdraft Protection

Have you ever been stuck on a purchase because you ran out of credit? Often, you either incur overdraft fees or leave without your item. This draft ranges from $30 and above for a single transaction. Besides, for a regular shopper, this problem can accumulate into hundreds of dollars. However, bounce protection becomes necessary to avoid a negative balance. In this article, you will find everything you need to know about overdraft protection.

1.    Meaning of Overdraft Protection

This term refers to the service that banks provide to prevent a customer’s account from going below zero. It does not matter whether this is a debit or credit card payment, electronic or USSD transfer, or check. When you request unavailable funds, you trigger a non-sufficient funds (or NSF for short) fee. This is also called an overdraft fee. As a result, your purchase will still go through, even if you have limited funds. If you connected another account to your checking account, your credit partner automatically transfers the deficit. Otherwise, the bank covers the cost.

Conversely, a bank can bounce your payment during such occasions if you have not pre-authorized them. Without this protection, you may pay up to $35 overdraft costs for a single purchase. Also, the merchant might pay the penalty for the failed payment. However, banks have different policies concerning their modus operandi and charge for this service. Consult your financial institution to ascertain your suitability for the service.

2.    Benefits of Overdraft Protection

  • It ensures that your transaction goes through. Even if you have exhausted every cent in your base account, bounce security allows you to perform your predetermined transaction.
  • It saves you during an emergency. When a contingency occurs, getting a friend to lend you money might be challenging. If you have apathy towards borrowing, a bounce security policy can be a lifesaver.
  • You avoid penalty due to a failed transaction or making a late payment. If this happens several times a day, you would have saved hundreds of dollars.
  • It is cheaper than paying an overdraft or NSF fee. You can save a few dollars off your total transaction fee.
  • It protects your pride. No one wants to have a reputation for failed promises or transactions. Bounce security comes in handy against discomfort or shame due to bounced checks.

3.    Drawbacks of Overdraft Protection

  • You have no control over how much your bank charges. Unlike normal transaction where you determine the amount to pay, you are at the mercy of the financial institution. Besides, you either pay what they demand or leave.
  • It relies on your backup account to go through. When you exhaust the content of your linked account, it poses a challenge to complete payment.
  • Your bank can cancel it at any time if they feel you are taking undue advantage of it. Ideally, it is an emergency initiative. However, if you make it a regular occurrence, it might backfire and show up as a negative expense.
  • It predisposes you to poor habits. Although you may always have a reservoir when your account runs dry, it increases your indebtedness over time.
  • If you borrow money via overdraft, you incur interest on the principal until you clear your debt.

4.    How to Avoid Paying for Overdraft

You have a choice whether to apply for overdraft security or not. Here are some tips on how to go about it.

  • Just do nothing. Ideally, the bank declines any transaction when you have an insufficient balance. So, if you can cope with the effects of an unfinished payment, you can go ahead.
  • Research overdraft policies of different banks. Some financial institutions have designed more customer-oriented programs. Find out the one that resonates with you and switch appropriately.

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