Even though you keep a record of your credits and debits in your check register you could get a notification that you bounced a check if you misjudge the timing of a deposit. It can happen to anyone. Many banks offer overdraft protection expressly for this situation. This account feature can eliminate the awkwardness of bouncing a check or having a problem with a debit card purchase. Overdraft protection allows you to link your checking account or money market account to a savings account so that funds can be made available to cover any debits from your transactional accounts.
Here is a quick guide to overdraft protection:
• Cover the difference. If you overdraw your checking or money market account by writing a check or buying something on your debit card, and you have overdraft protection, the bank will pay the difference. Your checking or money market account will carry a negative balance but you will not be charged a fee for overdrawing your account.
• Line of credit. The amount that you overdraw your account is charged to a line of credit. The bank, based on their policies and your credit history, will calculate your available line of credit. These funds are used to cover the difference. The bank may charge you interest on the amount that is borrowed from your line of credit or may charge you an annual fee for the protection.
• Payments. Payments to your line of credit are paid when you make a deposit. Funds over the amount owed to your line of credit will be deposited in your checking account. Be sure to read the terms and conditions for overdraft protection from your bank to understand if there are other requirements.
• Abuse. If you abuse your line of credit the bank can take it away. The line of credit is a short term solution, not a loan from the bank. Be sure to balance your accounts properly – overdraft protection is only a safety net.
While overdraft protection is a handy feature, the best way to avoid fees is to avoid overdrawing your account. But if you make a mistake, knowing you have overdraft protection can help you avoid any embarrassing situations. An overdraft protection plan may be handled differently from institution to institution so be sure to understand how the plan at your institution works.