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What is Overdraft Coverage?
Overdraft coverage is money that is provided to complete a transaction when a person overspends. In some instances, these funds are loaned to an individual by her financial institution. In other instances, these funds may be drawn from other accounts that a person has. Overdraft coverage is controversial for a number of reasons, including the total cost of such services and the lack of emphasis on financial responsibility.
When a person tries to conduct a financial transaction, she generally needs to have sufficient funds to cover the cost of it. Overdraft coverage, also known as overdraft protection, allows a person to proceed with the transaction despite having insufficient funds. Consider, for example, that an individual goes into a store and attempts to use her debit card to purchase $45 US Dollars (USD) worth of groceries but she only has $30 in her account. Without some type of assistance, this transaction could not be completed and she would need to reduce the costs of her bill.
In many instances, the funds that are used to complete the transactions are provided by the financial institution that holds the account that is being used. When overdraft coverage is provided, a person is generally required to repay the amount that was loaned and an additional amount, which is usually referred to as an overdraft fee. Some financial institutions charge additional overdraft fees when the debt is not settled within a certain number of days.
The fees that are associated with overdraft coverage cause much of the debate about this type of service. The amount that the financial institution provides to complete a transaction is often small. The fees, however, may be several times greater than that amount, making this an expensive means of conducting business. This led to legislation in the U.S. in 2010 that bars financial institutions from automatically extending this type of service for certain transactions. Instead, people who would like this type of coverage need to opt in before receiving it.
Sometimes overdraft coverage is provided from a person’s own financial resources. If, for example, a person has a checking account and a savings account, he may agree to allow funds to be taken from his savings account if he overdraws from his checking account. There may be a fee for this service, but when there is, it tends to be substantially lower than those for bank-provided coverage. Overdraft protection of this type is also controversial because many argue that consumers need to be financially responsible and that overspending should be discouraged.
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![Overdraft coverage is designed to cover overspending.]()
By: Tyler OlsonOverdraft coverage is designed to cover overspending.
Discussion Comments
I think the only overdraft coverage that's worth signing up for is the one that withdraws the needed funds from a savings account instead of causing an overdraft in the checking account. I have this coverage, and it is very helpful.
I think an overdraft coverage is not such a bad thing. And if someone has a good standing with the bank, he or she may not be charged as many fees. The bank may also give a grace period for the money to be returned without charging extra fees.
So it really depends on the policies of the bank. Every bank is different and has different rules and consequences for overdraft coverage. So everyone must find out more about this from their bank specifically.
My only overdraft incident was when I was in college. I did not have a lot of money in my account most of the time and I did not realize that several payments had not been processed yet. So I thought that I still had money to spend and caused an overdraft.
This was before 2010, so I was able to make the purchase but faced an overdraft fee. I actually also had to pay an additional daily fee that was placed on my account because it took several days for my paycheck to come in. So the fees I paid were certainly much more than what I had borrowed from the bank. I'm glad that banks have stopped automatically giving overdraft coverage. The terms of this coverage are certainly not very advantageous for bank customers.
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