By Trish Savage, M.S., AFC® University of Missouri Extension Family Financial Education Specialist
Do you use an overdraft protection service from your bank or credit union? If so, you are one of the many consumers who do. Overdraft protection is an option most banks and credit unions offer to their clients so transactions (demands for withdrawal) will be processed and vendors will be paid even when there is an overdraft.
An overdraft occurs when the demand for payment arrives at your bank after you have written a check, have an electronic automatic bill payment processed, requested an ATM withdrawal or submitted a debit card transaction and there are insufficient funds in your bank account to cover the amount. Overdrafts can be very expensive because both vendor and bank can charge fees for transactions when there are insufficient funds.
The best way to prevent costly overdraft charges is to manage your cash flow. Simply put: know your account balance and spend accordingly. But, “life happens” and situations can arise when your funds don’t cover your spending. As with any product or service, buyer beware is a healthy approach for consumers. Bank regulators and the Consumer Financial Protection Bureau (cfpb) have been noticing the increase use and cost of these services. According to the cfpb “overdraft and insufficient funds fees generate over half of bank profits as the fees charged to consumers are high compared to the cost for the banks”. When a bank covers the amount that you are short instead of returning the check or declining the debit, basically, you make a short term loan (with fees and interest charged). Before signing up for an overdraft protection service, find out the bank’s specific options and fees as they usually have multiple ways to cover overdrafts, some more costly than others.
Tips for replacing the need for overdraft protection:
• create a spending plan based on your cash flow
• balance your checking account and view your accounts online for up-to-date balance
• start an Emergency fund for those unexpected financial demands
• arrange for email or text alerts to warn of possible overdraft
• arrange automatic deposit from income sources or use mobile bank deposits