What Is an Overdraft?
An overdraft occurs when you try to withdraw more money than what you have in your account, making your account balance negative.
What happens in this case? Am I allowed to withdraw the money?
Normally, the bank or credit union would refuse the withdrawal or return the check because of Non Sufficient Funds or NSF, and charge an NSF fee for this, which is around $35 for most banks.
Is there any way to avoid this?
Yes, you can avoid this by enrolling for overdraft protection.
What is overdraft protection?
When you opt for overdraft protection, the bank allows you to withdraw money even when you have insufficient funds. In effect, the bank lends you the money to cover the shortfall.
Do banks charge any overdraft protection fee?
Yes, there is an overdraft protection fee of around $35 for each instance of overdraft. The bank can also charge interest on the shortfall amount.
What is the advantage of overdraft protection? The overdraft protection fee is almost the same as the NSF fee charged when I don’t have the overdraft protection!
While you are charged a fee in both instances, your payment would not be declined if you have overdraft protection. Which means that if you have written a check for paying your rent for example, it would not bounce. This would also help you avoid any non-payment, late-payment or check-return fee that can be charged by your payee.
Are there any disadvantages of overdraft protection?
If used too much, the overdraft protection fees and interest can add up, which is not good for your finances. You should try to keep a little extra money in your account to prevent over drafting by mistake.
Is there any alternative to overdraft protection?
Some banks let you link your savings account with your checking account. In this case, if you overdraw your checking account, money from your savings account is transferred to your checking account to cover any shortfall. There is a fee for this as well, but it is usually much less than the overdraft fee.
Podcast:What Is Overdraft and Overdraft Protection
Fun, informative and concise episodes by a 10-year old, breaking down complex financial concepts in a way that kids and beginners can understand. Episodes cover personal finance topics like saving, investing, banking, credit cards, insurance, real estate, mortgage, retirement planning, 401k, stocks, bonds, income tax, and more, and are in the form of a conversation between a cowboy (a finance novice) and his friend, a stock broker. Making finance your friend, only at Easy Peasy Finance.
A little bit about me: I have been fascinated with the world of personal finance since I was 6! I love to read personal finance books, and keep myself updated on the latest by reading various personal finance magazines. My friends often ask me questions about finance because they find it complex and intimidating. That’s what inspired me to start my YouTube channel called Easy Peasy Finance when I was 8, and this podcast 2 years later.
Everything you need to know about Overdraft and Overdraft Protection: What is Overdraft, What happens in case of an overdraft – are you allowed to withdraw the money, What is overdraft protection, Do banks charge any overdraft protection fee, What is the advantage of overdraft protection, Are there any disadvantages of overdraft protection, Is there any alternative to overdraft protection, and more.
Show notes and transcript at: https://www.easypeasyfinance.com/what-is-overdraft-and-overdraft-protection/
