Financial emergencies can occur at any time, leaving many individuals in a lurch when it comes to figuring out just how to come up with the money to cover it. While there are several options out there such as payday advances, pawn shops, title loans and selling gold for cash, none of these options are as easy, as quick or as potentially expensive as overdraft protection.
Overdraft protection is where your bank allows you to overdraw your checking account in order to cover an ATM withdrawal or purchase via check or debit card. For this courtesy, the bank will charge you a fee per item that clears your account without sufficient funds available. The bank will either then allow you to carry a negative balance for a few days to a few weeks and wait for you to make a deposit or cover the deficit by withdrawing funds from a backup source such as a savings account or credit card.
The nice thing about overdraft protection is that it’s quick and easy. The funds are available from any ATM machine, on any day of the week, at any time of the day or night. The amount that you can overdraft your account is determined by your bank. Most banks limit overdrafts to $500 or less, though some will allow more if there are backup funds available. Some banks reserve overdraft protection to simply covering checks or debit purchases while others allow cash withdrawals.
The main drawback to using this feature is the cost. Banks will charge you a fee, usually averaging $32-$38 per item that they pay on your behalf. These fees can add up quickly and will make up a significant portion of your negative account balance. These fees, along with the other overdrafted items must be resolved within the guidelines set forth by your bank’s overdraft policy or your account will be in jeopardy of closure. If your account is closed for unresolved negative balances, most banks will add your name to the ChexSystem database making it virtually impossible for you to open a new account elsewhere for up to 5 years from the date of report.
There has been a whirlwind of discussions that revolve around the topic of overdraft protection in recent months stemming from the current economic recession and banks that charge excessive overdraft fees and post items in such a way as to maximize revenue from overdraft fees. Recently passed legislation prohibits banks from charging more than 4 overdraft charges in one day and requires appropriate controls that govern item posting in order to prevent unnecessary overdraft charges from being assessed to customers. For existing accounts, the guidelines set forth by the federal government require that banks institute the new laws surrounding managing overdraft protection by August 1st 2010. For new accounts, the new laws go into effect by July 2010. In light of the impending changes, most banks have begun to implement the changes, which have already shown marked improvements.
