What Is An Overdraft Account?

An overdraft happens when withdrawals a consumer’s bank account are greater than the available balance. As a result, the account ends up with a negative balance. The term used for this situation is “overdrawn”. A bank account owner can enter into a prior agreement with their bank or financial institution, for an overdraft protection plan. When this type of plan is in effect, when the negative balance is within the authorized amount, the interest is charged at the agreed upon rate. When the balance is greater then the agreed upon amount, fees are charged and a higher interest rate is a result.

Overdraft protection accounts are also known as “courtesy pay program protection” This type of program pays items presented to a consumer’s account when available funds are not present to cover the amount of the withdrawal. Without this type of protection a bank will more than likely return checks and not pay them on behalf of the account holder. This is particularly true with overdrawing an account happens regularly. When this happens a checking account owner is in the predicament of being charged high bad check fees to the companies they do business with. It also prevents the receiving institution from knowing that the customer's account is overdrawn which can serve to protect the customer's reputation.

Overdraft protection plans may cover ATM withdrawals, purchases made with a debit card, electronic transfers (EFTs), and checks. However, ATM withdrawals and purchases made with a debit or check card are considered preauthorized and must be paid by the bank when presented, even if the transaction caused an overdraft. If corrected in a timely manner, the cost of overdraft protection is typically lower than the fees charged for bouncing a check. The bank will charge their customer a non-sufficient funds fee (NSF), for bouncing a check and the cashing institution will charge a returned check fee, sometimes in addition to the amount of the check. This system of fines may be dramatically higher than the single overdraft protection fee. This is what makes an overdraft account a good option. Especially for consumers who are not good at keep track of their financial income and outgo.

This type of plan should not be used as a crutch, because if the overdrawn account remains over a long period of time, the costs of overdraft protection are increased. Over time, the interest accumulates and is eventually treated as a line of credit. This line of credit, when not paid, will like be turned over to the credit reporting agencies and show up on the consumer’s credit report, thus lowering credit score. There is a chance that the bank account will be closed if other payment arrangements are not put into place.

It is a good idea to have overdraft protection, but it is best to understand that no matter the safe guards that are put into place, it is best to be diligent in paying what is owed. It is the best, least expensive option available.

How an Overdraft Account Can Help You with Your Finances

Not all consumers are good at keeping track of their finances. If you are getting numerous or even a few overdrafts on your bank account, you know how expensive a lack of financial education can be. One of the first steps to curtailing the fees involved in overdrafts is to obtain an overdraft account from your bank or credit union.

Overdraft protection programs can be a good option for you. It is best to shop around to minimize costs. Depending on the frequency of the overdrafts, one program may be better than another. It is possible to use a second savings or checking account to pull funds from. It is specifically set up as an overdraft account and acts as a link between two bank accounts. It would help your finances because it allows you to avoid overdraft charges. An overdraft line of credit may be more advantageous for you, so it is best to speak with your banker about this option. He or she will explain how the process works and what the fees (interest rate) and also what the consequences are in the event of an overdraft.

It should be obvious that the best way to minimize overdraft protection cost is to make sure your spending does not create overdrafts on your account. Many banks provide online access to your bank accounts, so it is easier than ever to keep tabs on finances. The best thing is to be proactive. Having an overdraft account is certainly proactive. Even if you rarely overdraw your account, it is a good idea to have an account in place to take care of negative balances. Most banks charge $30 or more for each transaction that is processed after a balance becomes negative. If your account becomes overdrawn once a year, having an overdraft protection plan is not a waste of your time and money. A bank or financial institution will go ahead and pay a transaction that goes through based on the agreed upon overdraft amount. Though there is an interest charge involved in a negative balance, more than likely it is much less than $30.00, though it is based on a percentage of the negative balance.

The main benefit of an overdraft account is that the person or company you wrote the check to is never aware that you were short on cash when you presented the check. This protects you from embarrassment, especially if you wrote the check to a friend, family member or business partner. When you have an overdraft protection plan you are able to help your finances because you do not incur bad check fees that would occur if your bank does not pay your checks that create a negative balance. Normally, without this protection, you spend much more for your error. The bank charges you for overdrawing and the company you wrote a check to also charge a fee. Charges can be upwards of $50.00 for each time you send a check through your account and cause it to increase the overdraft.

An overdraft account assists with keeping a good credit score, as long as you use the overdraft account properly.