Some people keep hundreds or thousands of dollars in the checking account at all times to avoid falling below a zero balance with unplanned purchases. However, many other people hover close to the breakeven point. And this means that the smallest financial error can result in your account being overdrawn. When your account is overdrawn, it means that your account has a negative balance. This term most commonly refers to a checking account. You can use overdraft protection to prevent your account from going in the red.
Understanding Overdraft Protection
When your account balance is negative, your bank may charge an overdraft fee. In some cases, this fee may appear for each additional charge you make to the account after it reaches a zero balance. For example, this may be a $25 fee. And you may make three charges to the account before you realize you are overdrawn.
This means you would tally $75 in overdrawn account fees. In other cases, the bank may decline the transaction on the spot. And you will have a very embarrassing or difficult situation to deal with.
Overdraft protection links another account to your checking account. If your balance drops below zero on your checking account, funds from the secondary account pay for the charges you want to make. This helps you to avoid embarrassing situations or unnecessary overdraft fees.
Limits and Amounts
Before you sign up for this type of protection, it is important to know what the limits are. Typically, the balance available in the linked account will be your protection limit. Therefore, if you link the account to your savings balance and you have $500 in your savings account, you will have $500 in additional protection to rely on in a worst-case situation.
Different Types of Overdraft Protection
If you are thinking about setting up this type of protective service on your checking account, you should be aware that there are two main options available. First, you can link the checking account to your savings account balance.
Second, you can link the account to your credit card. Typically, you need to make the backup account through the same financial institution where you have your checking account. There is not usually an established fee for setting up this service through most banks.
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How to Apply for Overdraft Protection
Even if you typically keep a rather large amount of money in your bank account, it makes sense to have extra protection by linking your accounts. It is usually available without any costs to you, and it gives you added peace of mind in the event of an emergency situation. There are several ways to set up this type of protection for your account.
- Know your options. Before you can link your accounts, you need to determine what the options available are with your bank. Some banks only allow you to link a credit card, and others only allow you to link a savings account. In some cases, you may need to open one of these accounts before you can apply for the added protection that this service provides.
- Keep your savings account funded. If you plan to use a savings account for this purpose, you will need to ensure that your savings account has ample funds in it.
- Go online.One you have determined which account you want to link to your bank account, you may be able to apply for this service by logging into your checking account online. It may take a few days for the protection to become active. Therefore, avoid relying on it until you know that it is in place.
- Call your bank. You may also be able to set up your protection by calling your bank’s customer service phone number. Most banks will accept your application or request over the phone.
- Fill out a form. In the event you need to complete a written form, the best way to do this is to visit your bank’s branch in person during normal business hours. Both of these options may also require several days before applying for the protection as well.
How Does Repayment Work?
If you have never used this service, you may be wondering how it works. Each bank has a slightly different process, so you should ask questions to better understand it before you rely on it. Generally, however, the process begins when you make a purchase that puts your account in the red.
However, rather than falling to a negative balance, the bank will transfer enough funds from your backup account into your checking account to cover the charge that you have made or the check that you wrote.
Your backup account will then immediately receive a debit for this amount. No overdrawn account fees will be incurred. They usually notify you immediately as the protection service is in use. So that you can avoid making additional charges to the account.
Because your savings account balance is low or because they charge your credit card in this process, there is no need for an immediate repayment process. However, you will need to make regular payments on your credit card as required.
If you use a savings account as your linked account, you likely will want to increase your balance up to a higher level once again as soon as possible.
FAQs We Know You Have
Q. How soon are funds transferred when the overdrawn account service is applied?
A. In most cases, the funds transfer immediately. As soon as you complete a debit purchase with a check card or when a check hits your account that puts you in an overdrawn status. And the funds will transfer from your linked account.
Q. How can you increase your level of protection?
A. If you do not currently feel protected by this service, you may be able to increase your level of protection by increasing your savings account balance or your available credit.
For example, if you link the account to your credit card, you can pay down your outstanding balance to have more available credit.
Q. How will you be notified if your protection service is used?
A. Your bank will determine your notification method. In many cases, banks use a text messaging system to notify you that your account has been overdrawn.
Also, that protection service is in use to pay for your most recent purchases. However, some banks use a phone call or an email message.
Q. Can you link to two or more accounts?
A. Most banks do not allow you to link more than one account to your checking account. Therefore, you should choose your linked account with care.
For example, if your account is linked to your credit card, keep your credit card balance low. Keep in mind that you can always change the account as needed as well.
An overdrawn account can be stressful to live with. You may need gas for your car, but you may not have funds available in your account to pay for it. You can avoid this and other similar situations when you take a few minutes to adjust your account settings and to add this protection to your account.