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What Is Overdraft Fees Protection and How Does It Work?

By June 24, 2022No Comments
overdraft fees & protection

How do Overdraft Fees Work? 

To put it another way, overdraft fees happen when a bank enables a client to withdraw more money than they have on hand.

An overdraft occurs when you use your debit card, an ATM, or a cheque to withdraw money, among other things. If you want to prevent going over your budget, you must keep track of how much money you have in your account and how much money you are spending.

As with other types of borrowing, interest is usually charged on most overdraft repayments. To compare the costs of different banks’ overdrafts, the annual percentage rate (APR) is often used to describe this interest.

What is an Overdraft?

When the amount in your bank account falls below zero dollars, this is known as an overdraft. This indicates that you attempted to spend more money than you possess. This might take place each time you withdraw cash from an ATM, make a purchase using your debit card at a shop, write a check, make a bank transfer, or pay a bill using a pre-authorized payment.

There are two different conceivable outcomes to this circumstance. If you have overdraft protection, your account will show a negative balance, such as -20 dollars, and you will be subject to fines and interest associated with overdrafts. If your payment is declined because you do not have enough money in your account and do not have overdraft protection, your bank may charge you a fee for insufficient cash (NSF).

Several Overdraft Types

  • Since they are prearranged, authorized overdrafts are sometimes called “arranged” overdrafts. You and your bank determine a limit, and you may only spend up to that amount.
  • Unauthorized overdrafts—also called “unplanned” or “unarranged” overdrafts—occur when you spend more money in your bank account without getting permission in advance. This includes going beyond the permitted overdraft limit.

How can I submit an overdraft request?

When applying for a bank account, you may request an overdraft. Generally, depending on your preference, you may apply for an overdraft with your current bank using the mobile banking app, internet banking, or in-branch. It could take a few days if your application is submitted outside of regular business hours. To prolong an existing overdraft, you must follow the procedure.

What is the overdraft protection limit?

The bank account you are applying for is only one of several variables that affect overdraft limits. Given that overdraft fees are often one of the bank’s most profitable products, it is not unexpected that most high street banks provide some kind of overdraft facility. There are, however, certain exceptions: basic bank accounts often do not offer an overdraft capacity for people new to credit or for those who have had a bankruptcy or an IVA.

Even if you apply for a bank account product with an overdraft capacity, you may not always be approved since it is totally up to the bank’s decision and “subject to status.” When you apply for an overdraft, the relevant bank will evaluate your creditworthiness, considering your age, income, and credit rating. You will be presented with an individually designed overdraft facility based on the bank’s results.

How long is it permitted?

Overdrafts are a kind of revolving credit, similar to credit cards, in contrast to repaying loans, which are fixed repayments made over a certain period. This implies that you may pay off a current overdraft fully one day, then dip into it the next (as long as you stay within your authorized overdraft amount). As long as the bank authorizes them and you pay the associated fees and penalties, overdrafts are accessible.

What are fees?

Banks may charge you for overdrafts in a bewildering variety of ways. Suppose you often use overdrafts and are planning to transfer current accounts. In that case, verifying and evaluating all related fees is essential since they may vary substantially across banks. Calculate what banks would charge you for the same amount based on your frequent overdraft use; what first seems a cost-effective choice may be an expensive oversight.

How do banks determine overdraft fees?

Significant modifications to the way banks and building societies computed overdraft fees went into effect in April 2020. Overdraft charges used to be often calculated daily or weekly, and unauthorized overdraft charges frequently significantly outweighed authorized overdraft charges. The newly made improvements ensure that all overdraft interest rates, whether authorized or not, are uniform and levied at the same single interest rate (APR).

If I have an overdraft, may I change banks?

Yes, changing your current account is possible even if you have an overdraft. While moving funds, you apply for an overdraft. After doing a credit check to determine your creditworthiness, your new bank will decide whether to provide you with an overdraft or not.

How to prevent overdraft fees

The most straightforward answer is switching to a bank account that provides a fee-free overdraft up to the level you may require.

Many banks provide a free service that will give you an alarm email or text message when you are approaching your overdraft limit if you often go over your overdraft without intending to.

It can make sense to pay off your overdraft entirely, depending on your overall financial circumstances and your assessed costs.

Guidelines for managing your overdraft

Keep an eye on the balance of your account.

One of the most excellent methods to prevent overdraft fees is to keep track of your account balance.

Make it as simple as you can by:

  • if you have a smartphone, download the app for your bank.
  • setting up SMS notifications for low-balance situations
  • Banking over the phone.

Read the letters from your bank again.

It’s simple to develop the habit of believing that letters from the bank are just ordinary mail and not opening them.

Check all letters carefully since the bank could be writing to inform you of an increase in the overdraft interest rate or a change in your overdraft limit.

If you have any savings, use them.

If you have both an overdraft and savings, paying it off using your savings will be more affordable in the long run. You may still utilize your overdraft to cover any further unforeseen expenses. If you don’t, you may begin saving again, so you’ll be prepared for unexpected costs.

Look for methods to save costs.

Spending less can help you free up money to minimize overdraft as quickly as possible. You may then use the money you save to pay down your overdraft.

Change banks

Change to a bank account with less expensive overdraft fees. If you often use your overdraft, look around for the best deal. To help you pay off your overdraft, you could even be able to transfer to an account that offers a switching incentive.

How is an overdraft repaid?

If you can start paying off the overdraft right once, do so. An overdraft doesn’t have a repayment schedule like loans or credit cards. Thus it’s up to you to pay it off.

Calculating your debt is the first step in paying back an overdraft. Create a budget after you have the figures in front of you to see how much you make and spend each month. Calculate the amount you can afford to pay toward clearing your overdraft and establish a deadline for completion.

Consider using your money in a low-interest account to pay off high-interest debt. It may sound contradictory, but with interest rates at an all-time low, having an overdraft is probably costing you far more than you can make in interest from savings.

What will happen if I am unable to repay?

Thinking about a money transfer credit card can be worthwhile if you cannot pay off your overdraft in full or even in smaller installments due to the recurring overdraft costs you are assessed.

With a money transfer credit card, you may move all your overdraft debt to another card for a certain period at no interest (between 12 and 36 months is normal). To avoid paying a high-interest rate, it’s essential to make sure you pay off the card before the promotional period expires. Make sure you have a strategy for paying off the card; regular monthly installments are an excellent option. During that period, you shouldn’t make any purchases with the card.

Is It Bad For My Credit If I Have An Overdraft?

As long as you pay back the overdraft in full and on time, it will not affect your credit score.

Bank account spending is often not reported to credit bureaus since the funds are your own money. Unless you default on your loans, your overdraft is irrelevant to them. Because of this, your credit history will remain unharmed if you manage your overdraft responsibly.

Luke Pitt