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Overdraft FAQ

What is an overdraft?

An overdraft occurs when a bank pays a transaction even though the customer doesn’t have enough money in the account to cover it.

What is overdraft service?

Overdraft service is a courtesy of a bank. The bank trusts the customer to repay the amount of the overdraft. There is a fee associated with overdraft service which varies by bank.

Can customer avoid overdraft fees?

Yes. There are a number of options to avoid having overdraft fees. Customers can link their checking account to another account such as a saving account. If an overdraft occurs, money would be transferred from the savings to cover the overdraft. Customers can also apply for an overdraft line of credit. Overdraft lines of credit amount are generally based on credit worthiness. There are interest charges, but they may be less than an overdraft fee.

The best way to avoid overdraft fees is to keep accurate records and know the balance of your account. A checkbook register can help you keep track of your deposits, written checks, and other withdrawals including service charges, ATM and debit card transactions. Having extra money or a “cushion” in your account is a good tool as well.

Why do banks pay overdrafts?

Studies show that people want important checks such as mortgage payments to be paid and are willing to pay a fee. By paying the check in the overdraft, the customer avoids additional fees and embarrassment.

People may also want their debit card or ATM transactions paid to avoid embarrassment or help with unanticipated cash flow emergencies.

Why aren’t overdrafts free?

Overdraft fees are intended to remind customers to be careful about managing their money. And, just like any other business, banks have to cover the cost and risk of allowing the overdraft. If the customer does not pay the overdraft, the bank has a loss.

What is the new law that went into effect July 1, 2010?

The new law specifically affects ATM transactions as well as everyday debit card transactions such as purchases at a store or on the internet. Customers must agree or “opt-in” before the bank can charge an overdraft fee for paying ATM or everyday debit card transactions that may cause an overdraft.

What about automatic bill payments that are paid with a debit card?

Automatic bill payments that have been arranged are considered recurring. The bank may, at its discretion, pay recurring transactions, but a fee will be charged even if the customer has not opted in.

If the customer opts-in, will the bank always pay ATM and everyday debit card transactions even if there is not enough money in the account?

No. Unless there is an overdraft line of credit, the bank does not guarantee that ATM and everyday debit card overdrafts will be paid even if the customer has opted-in. Standard overdraft services are a courtesy provided at the bank’s discretion.

If the customer does NOT opt-in, does it mean they will never overdraw their account using a debit card for ATM or everyday transactions?

No. Occasionally it may be possible for the bank to pay an ATM or everyday debit card transaction even though there is not enough money in the account. Customers should not assume that because the ATM or other debit card transaction goes through that there is enough money in the account to cover it. The customer still must re-pay the bank to cover the overdraft.

How do customers opt-in?

Banks allow customer to opt-in online, by phone, in person, or in writing.

Can customers opt-in at the time of a debit card transaction?

No. If a customer wants to use their ATM and everyday debit card overdrafts paid and are willing to pay for the service, they should opt-in before they need it.

Will banks stop offering overdraft coverage?

If additional restrictions are placed on overdraft coverage, banks may decide that it is too costly to offer this service. At which point, customers accustomed to overdraft services will have their payments denied.