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Overdraft protection

Overdraft protection is a banking term that is important to understand. Bankrate explains it.

What is overdraft protection?

Overdraft protection is a service provided by a bank that protects against nonsufficient funds, or NSF. If you spend more than what is in your checking account, overdraft protection covers the purchase. Banks charge a fee for this service.

Deeper definition

Overdraft protection sounds like a positive thing, but the fees can be steep. And because many consumers use their debit cards numerous times a day, those fees can add up quickly. The average overdraft fee is $33.04.

Some consumers are not aware that they have overdraft protection and assume that if they overdraw their account, the bank will simply decline the transaction. It’s smart to ask the bank about overdraft protection when you open an account. If you have an account already and don’t know whether you have overdraft protection, call your bank and ask.

ATM fees are also on the rise. Learn more here.

Overdraft protection example

On Aug. 15, 2017, a new Federal Reserve rule takes effect that prohibits banks from charging overdraft protection fees unless a customer has opted into the service. If you decide to sign up for overdraft protection, it may be because:

  • You do not want to be embarrassed by having your debit card declined.
  • You believe it may be useful in an emergency situation, such as running out of gas.
  • You see it as an expensive short-term loan of sorts.

There are at least two ways you can reduce overdraft fees:

  • Link your checking account to another source of funds (like savings or a credit card) to be used before the overdraft feature kicks in.
  • Ask about an overdraft line of credit, and find out whether it would be a less expensive option.

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