December 8, 2022
Summary: Nobody wants to overdraft their account. However, in the event of an emergency or other unexpected event, you might find yourself in the red. Banks offer a variety of services to help protect you in the event you overdraw your account.
An overdraft occurs when you don’t have enough money in your account to cover a transaction such as a check or a purchase with your debit/ATM card.
When you set up a checking or savings account you can select froma variety of overdraft protections. These protections can help you avoid fees and headaches. But, there may be costs associated with overdraft protections.
Deciding whether you should utilizethese programs will depend on your specific situation and how you manage your finances. For this reason, you should research your bank’s various overdraft policies before you choose to enroll.
Below, we’ll provide some basic information about what an overdraft is and the various protections banks commonly offer to help you manage and avoid them.
However, please keep in mind that every bank has different policies. Be sure you reach out to your bank if you have any specific questions about the overdraft protections they offer.
What’s an overdraft?
An overdraft occurs whenever your checking account falls below $0 due to a withdrawal, cashed check, fee, transaction or other reason.
Banks will use the term “non-sufficient funds” (NSF) when you overdraw your checking account. This term means that there isn’t enough money in the account to pay the transaction written against it.
When an overdraft occurs, the consequences will depend on your bank’s policies and whether you’ve opted into your bank’s overdraft protection program.
What are my options when it comes to overdrafts?
Nobody wants you to overdraw your account. You don’t want it, the bank doesn’t want it and the individual or business you’re trying to pay doesn’t want it.
For this reason, banks provide a variety of options for making sure overdrafts don’t happen—and if they do—that the overdrafts don’t lead to fees and other negative consequences.
The terms “overdraft protection” and “overdraft service” may sound similar but there aresignificant differences between the terms:
- Debit/ATM card overdraft service — An optional service where you can ask the bank to let overdrafts go through for your account. This service will cover the expense in the event that you overdraw your account, but you may be charged an overdraft fee and will have to take action to bring your account back up above $0.
- Overdraft protection — An optional service where you can protect yourself from overdrawing your account by automatically transferring funds into the account from another source (such as a linked checking, savings, money market or credit card account). In most cases, the bank won’t charge you overdraft fees when you overdraft and use this service. However, there may be charges from the linked account (such as a cash advance fee from a credit card account).
Importantly, you should note that these are two totally separate services, and that you can opt in or opt out of each as many times as you want without any penalties.
For example, you could choose to only use the overdraft protection service to transfer money into your account in the event of an overdraft. Or, you could choose to opt in to both services to gain the benefits of both forms of protection.
Is it better to opt in or opt out of overdraft protection and the debit/ATM card overdraft service?
By law, Associated Bank will not automatically opt you into either of these services. For this reason, you’ll have to choose whether you want to opt in to your account’s overdraft protection and debit/ATM card overdraft service.
Whether you should opt in or not will depend on your specific situation and how you choose to use your account.
Some people may benefit from opting in to protect themselves from bounced checks or other important payments not going through. Others may feel that overdraft protections aren’t necessary and would prefer that their bank decline the transaction should there be a shortfall in the account.
The important thing to remember is that there are resources available to help you make an informed choice.
For example, you could schedule an appointment to talk to a local banker about your options or review other credible resources such as the FDIC’s Consumer News page on Overdraft and Account Fees.
No matter which path you choose, you should remember that you can change your mind at any point and choose to opt in or opt out of each service as you feel the need.
Can I opt in to both protection types?
Yes. In fact, this method is a popular strategy for gaining additional protections in the event of an overdraft.
If you overdraw your account after opting in to both the overdraft protection and debit/ATM overdraft service, your bank will go through a few steps to find a way to resolve the issue:
- First, your bank will try to pull money from the linked checking, savings or credit account you set up when you opted in to the overdraft protection.
- Then, if you don’t have enough money or credit in your linked account, your debit/ATM overdraft service will kick in and allow the transaction to go through.
- If the overdraft falls under your account’s grace zone (explained below), your bank won’t charge a fee for the overdraft as long as you pay it back quickly. However, if you need more than your account’s grace zone can cover, your bank will charge you afee for the overdraft.
- At this point, you’ll have a negative balance on your account. You will also have a short window to pay back the money and return your account to a positive number.
The key takeaway here is that choosing to opt in to both services will provide you with an additional cushion to protect you in the event of an emergency.
What’s an overdraft grace zone?
An overdraft grace zone is a limit on how far your account can go into the negative before your bank will charge you an overdraft fee. For example, if your account has a $50 overdraft grace zone, then you could overdraw your account by $49 without having to pay a fee for a short, specified period of time .
Note, however, that you’re still responsible for adding money to your account to bring the balance up to a positive number before this period expires.
How to avoid overdrafts in the future
Overdrawing your account can be stressful, and overdraft fees can drain your accounts if you find yourself below $0 too often. It’s important that you understand what an overdraft is and the steps you can take to avoid overdrawing your account.
Here are some important closing points to keep in mind:
- If your bank declines to process an overdraft, the merchant at the other end of the transaction may report your late or missed payment to the credit bureaus, which may have an impact on your credit score. You’ll also be responsible for making up both the original payment and any fees brought on by your late or missed payment.
- The benefit of opting into overdraft protection is that the service will cover any payments in the event you overdraft. However, your bank may charge you an overdraft fee for each transaction.
- A common solution to stop overdrafts is to link a different account so funds can automatically transfer in the event of an overdraft.
- It’s often beneficial to set up both an overdraft service and various overdraft protections (such as automatic transfers) so you can access your money in the event of an emergency without having to worry about overdraft fees.
If you have any questions about your Associated Bank accounts and how you can adjust your overdraft preferences, simply give us a call at 800-236-8866 or stop in at any of our Associated Bank locations. We’re here to help you avoid overdrafts and provide all you need to know about them.
