The best type of overdraft program depends on how you manage your bank account. Before you sign up for one, be sure you understand the type of program you're getting and what it might cost.
Here are the five main overdraft programs
offered by financial institutions, according to
the Federal Deposit Insurance Corp.
Linked transfer accounts
These are contractual agreements between a bank
and a customer, linking the customer's transactions
account with other accounts within the bank, including
savings and credit card accounts. In the event
of an overdraft, the bank will fulfill the customer's
obligation by transferring funds from the customer's
other accounts linked to the transaction account.
Overdraft lines of credit
Overdraft lines of credit are contractual agreements
between a bank and a customer that the bank is
willing to lend up to a specified amount over
a specified period of time to cover overdraft
items. These programs do not include line-of-credit
programs that don't specifically cover overdraft
items, such as home equity lines of credit. The
bank extends the line of credit after reviewing
a customer using standard underwriting criteria.
promoted overdraft programs
With an automated, promoted overdraft program,
a bank generally honors customers' overdraft obligations
and informs customers of the existence of the
overdraft protection program. The program is uniformly
offered to qualifying customers. Excluded are
all overdraft programs where APR is required.
The program is automated in the sense that standardized
procedures or a "matrix" is used to determine
whether the NSF item qualifies for the overdraft
Automated, nonpromoted overdraft protection
These are programs where a bank generally honors
customers' overdraft obligation, but customers
are not informed of the existence of the overdraft
protection program. The program is automated in
the sense that standardized procedures of a "matrix"
are used to determine whether the NSF item qualifies
for the overdraft protection.
Nonautomated, nonpromoted ad hoc overdraft protection
These include truly incidental and discretionary
accommodations to customers by banks to honor
overdraft items. These decisions are made independent
of, or override, the programs above.