Overdraft protection is a service offered by banks and credit unions that can help you avoid fees and embarrassment when you don’t have enough money in your account to cover a transaction. Instead of being declined or having your check bounce, the bank will cover the difference for you and charge an overdraft fee.
While overdraft protection can be helpful, it’s important to understand how it works and what options are available. Here are eight types of overdraft protection to consider:
1. Linked savings account
Some banks offer linked savings accounts as a form of overdraft protection. If your checking account balance falls below zero, the bank will automatically transfer funds from your linked savings account to cover the shortfall.
The advantage of this type of overdraft protection is that there’s no fee for transferring funds from one account to another within the same bank. However, keep in mind that there may be limits on how many transfers you can make per month without incurring fees.
2. Line of credit
A line of credit is a loan that gives you access to funds up to a certain limit. You only pay interest on the amount borrowed, so if you don’t use it, there’s no cost.
Many banks offer lines of credit as an option for overdraft protection. If your checking account balance falls below zero, the bank will automatically advance funds from your line of credit to cover transactions.
One downside to using a line of credit as overdraft protection is that interest rates can be high compared with other forms of borrowing such as personal loans or credit cards.
3. Overdraft transfer
Another option for avoiding overdraft fees is setting up automatic transfers between accounts at the same bank or credit union.
For example, if your checking account runs low on funds, money would then be automatically transferred over from either a secondary checking or saving account setup under this feature at no additional cost.
4. Credit card
Using a credit card as an alternative to overdraft protection is an option, but it comes with risks. If you use your credit card to cover a transaction when you don’t have enough funds in your checking account, you’ll be charged interest on the balance.
Additionally, if you carry a balance on your credit card and only make minimum payments, you could end up paying more in interest over time than if you had used another form of overdraft protection.
5. Online banking alerts
Many banks offer online banking alerts that can notify customers via text or email when their account balances fall below a certain threshold.
While this isn’t technically overdraft protection, it can help prevent overdrawn accounts by letting customers know when they need to transfer funds or hold off on making transactions until more money is available.
6. Opt-out of automatic overdraft coverage
In 2010, new regulations went into effect requiring banks to obtain opt-in consent from customers before charging them fees for covering debit card and ATM transactions that exceed their account balances.
If you haven’t already opted out of automatic overdraft coverage – which means declining the bank’s offer to enroll in an overdraft program – doing so may be one way to avoid unexpected fees.
7. Overdraft fee forgiveness
Some banks will forgive the first instance or two each year where an account goes negative as long as it’s promptly remedied within 24 hours; however, conditions do apply such as how long the negative balance lasts and what other activity was conducted during that time frame i.e., additional purchases made after going into negative territory etc…
8. Alternative Banking Options
If traditional banks’ fees aren’t appealing there are alternative options such as Chime Bank; where members are able to access up $100 without any fees under no extra charge at all with free early direct deposit services alongside exclusive discounts offered through its partners for additional savings.
In conclusion:
Overdraft protection can provide peace of mind knowing that your transactions will go through even when your account balance is low. However, it’s important to choose the right type of overdraft protection to avoid high fees and interest charges.
Consider linking a savings account or line of credit for automatic transfers, opt-out of automatic overdraft coverage, or use online banking alerts as alternative options. Additionally, some banks offer fee forgiveness while others may not charge any additional fees at all.
Don’t forget that there are also alternative banking options such as Chime Bank which provide no-fee overdraft services alongside other benefits for its members. Regardless of what you choose, be sure to read the fine print and understand how the service works before signing up.