What you need to know about overdraft protection

Many financial institutions offer overdraft protection for checking account holders. Overdraft protection can be a life saver or a huge headache. At New Covenant Dominion Credit Union, we offer overdraft protection for our member account holders. Keep in mind that overdraft protection is a backup plan that usually incurs fees when it is used. The following is what you need to know about overdraft protection. 

Pros and Cons of Overdraft Protection

You tend to be vigilant over your financial accounts.  You keep track of your account, and only write checks or make payments based on what’s in your account, right? However, there are times when certain transactions may hit your account either when it was not expected or all at the same time, leaving a transaction that may come back insufficient. For example, you wrote a check 2 months ago that was just deposited by the receiving party.  You forgot that the check still had not been posted to your account. It hits your account the same day a few payments are also scheduled to be withdrawn.  Your paycheck won't hit your account until the following day, leaving you with insufficient funds to cover all of the payments. Has this ever happened to you?

Another example is, on Tuesday, you had $100 available in your account. You used your debit card to purchase $40 of gas, reducing your available balance to $60.  You then purchase $50 worth of groceries on Tuesday. However, you forgot that you previously authorized the utility company to take $50 from your account automatically on Wednesday. When the utility payment hits your account on Wednesday, the balance is only $10. In this case, if you have overdraft protection, the bank will charge you $25 and then post the utility payment to your account. Without overdraft protection, the payment will be returned because of insufficient funds and an insufficient funds fee will be charged.

Pros of overdraft protection:

Overdraft protection is a service that a financial institution provides for checking or draft accounts that you can opt into. If you have insufficient funds to cover a check, debit card, or electronic transaction, overdraft protection will cover the insufficient funds so that the transaction goes through.  It is essentially a line of credit, up to a certain amount, that is provided as coverage for your checking account. 

Pros:

• Will cover the insufficient portion of your transaction so that it will be honored. For example, if a transaction for $300 posts to your account and you only have $250 available, the bank will charge you a fee and allow the transaction to post to your account- overdrafting it for $50. 

• Reduce the chance of insufficient funds fees. The same insufficient transaction can attempt to post to your account up to three times. Each time the transaction is returned insufficient, there is a fee. For example, at NCD CU our insufficient funds fee is $25.  You could pay up to $75 in insufficient funds fees for the same transaction if a deposit is not made before each attempt.

• Reduce the embarrassment of a bounced check and fees incurred on the depositing parties end. Fees may apply from both financial institutions involved.

• Minimize service disruptions for bill payments that are due. If you do not have sufficient funds to cover your bills at the time payment is due, overdraft may assist in honoring those payments to reduce service disruptions.

• Coverage for high volume transaction accounts.

Cons of overdraft protection:

While overdraft protection can be very useful, there are some downsides to the service if you use it irresponsibly. The financial institution is “lending” you money to cover the insufficient amount and there are typically fees associated with it. If you are not careful, those fees will accumulate, and you could end up owing money to the bank or getting the service removed from your account if misused.

Cons:

• There are fees associated with overdraft protection. NCD CU’s overdraft courtesy pay fee is $25 regardless of the insufficient amount. For example, there is a $100 transaction posting to the account and you have $95 available. If you are opted into overdraft protection, NCD CU will cover the insufficient amount of $5 and charge a $25 fee.

• There are limits on the amount and type of overdraft protection you will receive. Find out from the financial institution your options and what your limit is so that you do not go over the approved amount. 

• Increase occurrence of negative account balances. Even though the financial institution may honor the transaction, you are still liable for the amount covered and the fee associated with it. Prolonged negative balances could lead to removal of overdraft or account closure.

• Financial irresponsibility can be adopted if you rely too heavily on overdraft protection. The attitude that you don’t need to worry because the “bank” will cover it can leave you open to fees and lead to misuse. Overdraft is a backup plan, not “the” plan for paying bills or making purchases.

• You must opt in for overdraft on your debit card and electronic transactions. Ask questions about what is covered and what is not.

Given your financial history and habits, you must make the choice as to whether overdraft will benefit you or not. It is a great option to have because honestly, things happen. However, you must also consider the down sides. Here are some tips to stay on top of your account and reduce overdraft fees if you do opt in.

Tips for using Overdraft Protection

• Create a budget of your monthly income and expenses. Stick within your budget as closely as you can.  Also, look at when recurring bills are due so that you can plan ahead and ensure that you are covered with enough funds in your account.

• Register for online banking. This can help you keep track of your account in real time. You can check pending transactions, make a transfer from your savings account, or stay on top of your account balance to avoid negative balances.

• Set alerts for your account. When your balance goes below a certain amount, you will be notified so that you can take action immediately if necessary. 

At NCD CU we want to ensure that you are informed and make the best decision for you and your account. We offer online banking and a mobile banking app with account alert customization so that you can stay on top of your finances 24/7. 

*Please note that overdraft is available for member accounts only. You must opt-in for overdraft protection for both your checking account and debit/electronic transactions. Overdraft is not guaranteed.