If you write a check or make a purchase for more than you have in your checking account, your bank may cover the difference. This is still an overdraft, but one where the amount that has drawn the bank accounts below the amount of available of funds in the account is paid by the bank. To eliminate bounced checks or to simply provide insurance against the potential damage from bounced checks, many individuals obtain overdraft protection overdraft protection is an agreement with the bank or financial institution to cover overdrafts on a checking account. This service will typically involve a fee and be limited to a preset maximum amount.

Overdraft protection is a service provided by your bank that pays for things you buy after you’ve overdrawn your account. It means you’ll avoid bounced checks, and your debit transactions will still go through even if you don’t have any money in your checking account. Even with the fee charged by the bank for the additional coverage, this is generally far better than having the check returned by the recipient and still having to pay a charge by your bank and possibly a charge by the original recipient of your bad check. There are several major types of overdraft protection available today.

The tough new Check21 banking laws are making float time drop to almost nothing. This service may be of value if you draw your account down very low during limited times. Banks, savings and loans, and credit unions may provide other ways of covering overdrafts that may be less expensive.

With overdraft protection, you are still assessed a fee for any bounced checks or ATM transactions exceeding your account balance, and the extent to which you can borrow from your bank may also be set. With the overdraft protection, you’re charged a fee each time you have a transaction that overdraws the account and you have to pay the money back. You might have a dollar limit on overdrawing your account. If you exceed this limit, the bank will start bouncing your checks. Fees range substantially between banks for using overdraft protection services.

A courtesy overdraft service is when a bank uses its discretion to pay for items when a customer had overdrawn their accounts. This meant that the bank advances the money to the checking account that is short and allows the check or transactions to be cashed. Overdraft fees may be charged for the checks that are cleared and on any outstanding balance on the money the bank had to advance to bring it back in good standing. The terms and cost of this service will depend upon the bank where the account is held.

Banks use their discretion on this service and can choose to let you overdraw or let the check bounce depending on your status with as a customer. If you’ve never overdrawn before, they’re a lot more likely to cover your purchases than if your account is delinquent.

Another form type of overdraft protection uses linked accounts. Overdraft protection using linked accounts linking your checking account to another account, such as your savings account or money market deposit account. This manner of overdraft protection is a service that ties your checking account to the other account such as a savings account so that when you write a check that exceeds the available funds in your checking accounting, the bank will still honor and make payment on that check. When you overdraw your checking account, the bank can transfer funds from your savings account to your checking account. Some banks can still assess a fee for this service. This is often the best type of overdraft protection since you avoid paying the bank to use its money, which makes any fees considerably less.

Some banks will even allow you to link your account to a credit card you have with that bank. If you link your account to a credit card, any overdraft amount becomes a cash advance on your credit card. You will probably be charged a cash-advance fee, and interest charges on the advance will start immediately. The cost of this option depends on the interest rate on your credit card and how long you take to pay back the advance. If the linked credit is a credit card, you can also count on paying the cash advance rate for the money you use.

A similar kind of protection is the overdraft line of credit. This is similar to a linked account to checking or saving but the account linked is a line of credit. You need to apply for a line of credit account just as you would apply for a regular loan. If you overdraw your account, the bank will lend you the funds by using your line of credit to cover the overdraft. You will pay interest on this loan, and there may be an annual fee. But the overall costs may be less than the costs for courtesy overdraft-protection plans.

A clear downside to using an overdraft line of credit is the fact that you’re using credit to fuel your purchase.

Clearly, there are benefits to providing your own overdraft protection, but overdraft charges can be very expensive even when there is overdraft protection in place. This is often exacerbated for mostly for those consumers who are not aware of their account balance at all times, or are careless with ATM use or the checks they write.

Overdraft protection has made the switch from a generous courtesy on the part of banks to a profitable financial service. Because overdraft protection is seen as a fee-based service rather than a loan, in many cases you could be paying a hefty premium for the right to overdraw your account without a disclosure expresses exactly what rate you are paying to use the banks services.

If you get hit with overdraft fees for linked account or bounce protection, the easiest way to avoid having to pay is simply to call your bank and ask. It’s as simple as that. If you’ve been a customer in good standing for a while and this is your first or second time overdrawing, it’s more likely than not that the bank will let you off the hook.

Of course, the best choice is to just not overdraw your account at all, but this is obviously not the easiest answer for many people. Overdraft protection is a huge moneymaker for banks these days, and they know it. If you are going to overdraw your account, it can pay to have a handle on which kind of overdraft protection is right for you.

An area of controversy with regards to overdraft fees is the order in which a bank posts transactions to a customer’s account. This is controversial because largest to smallest processing tends to maximize overdraft occurrences on a customer’s account. This situation can arise when the account holder makes a number of small debits for which there are sufficient funds in the account at the time of purchase. Later, the account holder makes a large debit that overdraws the account whether it be accidentally or intentionally. If all of the items present for payment to the account on the same day, and the bank processes the largest transaction first, multiple overdrafts can result.

The “biggest check first” policy is common among many U.S. banks. Banks and credit unions contend that this type of banking practice is in place to prevent a customer’s most important transactions such as a rent or mortgage check, or utility payment are not returned unpaid. Some consumers have attempted to litigate to prevent the practice, arguing that banks use “biggest check first” to manipulate the order of transactions to artificially trigger more overdraft fees to collect. The process, however,is not illegal nor does it appear to have any pattern of intentional abuse when a bank utilizes this procedure.

Bank deposit agreements usually provide that the bank may clear transactions in any order, at the bank’s discretion.

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