What Is Overdraft Protection?

what is overdraft account

By Miriam Caldwell. Money in Your 20s Expert

Miriam Caldwell is a freelance writer with a specialty in personal finance. She believes that you can lay a solid foundation by starting to manage your finances in your twenties.

You need to be aware of the overdraft policies at your bank. Banks vary in what they call overdraft protection and a cash reserve account. The differences in the costs of theses services can be huge. You need to fully understand what your bank is offering as well as what happens if you were to overdraw at your bank.

Some banks will not allow you to go into the negative. This means that they will not pay on an item that will take you into the negative.

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However, that does not them from charging you a fee for having a returned item, which will put into the negative. Generally, a returned item fee is between $25.00 and $40.00. Additionally, you may receive another fee for allowing your account to go into the negative. You may be charged this fee on a daily basis.

Some banks offer a type of overdraft protection. It was a variety of names: overdraft protection is the most common. This means that the bank will allow you to overdraw your account up to a certain amount, and they will still pay the checks or debits.

You will be charged a fee per item that they pay. The fee is similar to the returned item fee. However these fees add up quickly. For

example if you are overdrawn, but then have two items present one for $5.00 and the other for $10.00 you would be charged the $30.00 fee twice. This means your $5.00 purchase actually cost you $35.00 and your $10.00 purchase cost you $40.00. Once you get started in this cycle it is difficult to get out of it.

Another option is an overdraft account or a cash reserve account.

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This is a line of credit that is attached to your checking account. When you overdraw the bank will transfer the money into your account to cover the negative balance. There is usually a fee of a few dollars per transfer. Your bank may transfer in increments of $50.00 or $100.00. Additionally, you pay interest on the money that you have transferred over. This is a much better option than overdraft protection. You would need to apply to receive this account, just like you do with a credit card. You should talk to an account representative at your bank to see if they offer this account.

While it is nice to have the overdraft protection, you should avoid overdrawing at all. You can do this by balancing your checkbook. keeping a running total and checking the balance at your bank to see if you have missed any debit charges you have made on a regular basis. These simple little steps can save you a lot of money if you take the time to do them consistently. Attention to detail will help you avoid most common financial mistakes .

Source: moneyfor20s.about.com

Category: Forex

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