Understanding the Pros and Cons of Overdraft Accounts

Understanding the Pros and Cons of Overdraft Accounts

In the world of banking, one of the most dreaded fees for consumers is overdraft charges. Anyone can make a mistake when balancing the checkbook. When that mistake results in a check being declined, the bank charges a non-sufficient fund fee. This can start a domino effect as the charge sends the account balance lower and other checks are returned. The best way for consumers to protect themselves is with an overdraft account, but you need to understand how these programs work.

 

Automatic Transfer of Funds

When a check is presented that exceeds your balance, the bank will automatically withdraw that amount from this special line of credit. Most banks round up the necessary amount to the nearest $100 or $50. If you don’t have at least that amount in the additional account, the check will still be returned and you will have to pay the fees. If the funds are available in the cash reserve account, then they will be transferred and the check will be honored.

 

Fees and Interest

The overdraft policies vary from one bank to the next. Some banks automatically transfer the funds from your overdraft account without charging other fees. Others may charge you $5 or $10 per transaction. This is still more affordable than NSF fees that could be $35, and it helps you avoid the ripple effect of additional fees. You may have the option of transferring the funds yourself to avoid this fee, so it’s important to know what’s going on with your account and be proactive if you notice that your balance is lower than you thought it would be.

Interest is another consideration. The cash reserve account is essentially an unsecured loan, so you will have to pay interest on what you borrow. Some banks have a 30-day grace period before interest starts to accrue. Others being charging interest the moment this reserve is tapped. As with the transaction fee, the interest is still more affordable than NSF charges.

Overdraft systems are designed to help you avoid the embarrassment and financial devastation of bouncing checks. The overdraft policies vary drastically from one bank to another. Some will provide you with a special line of credit just for overdraft, and others will simply link your checking account to an existing credit card. These are smart options that give you valuable peace of mind, but you must keep in mind that you will pay interest on the charges and there may be fees involved when you need to withdraw money from the account.