Friday, October 16, 2009
There are two main categories of bank accounts: loan accounts and deposit accounts. The purpose of loan accounts is to hold a debit balance (where the account holder borrows money from the bank), and the purpose of deposit accounts is to hold a credit balance (where the bank "borrows" from the account holder). The type most of us think of when we hear "bank account" is the deposit account; popular types of deposit accounts include savings, checking, and certificates of deposit (or CDs).
Another way to categorize bank accounts is by their function—while some accounts are designed for frequent transactions (transactional accounts), others, such as CDs, are not.
When a customer withdraws more than the account's available balance, an overdraft occurs. An overdraft, in essence, means the bank is providing credit to the account holder, giving the account a negative balance. If the overdraft is unauthorized (i.e. the account is not a loan account), the bank will normally charge an overdraft fee, often around $30, though if you call and ask nicely, some banks will waive your first overdraft fee, especially if you are a student or if it's your first time overdrafting.
The best thing to do to avoid overdrafts, of course, is to keep close track of all your transactions, and always be sure to keep a "cushion" of at least $50 more than you expect to be withdrawn (both directly and through debit cards, checks, and transfers) just in case you miscalculate. This number should be higher if the majority of your withdrawals are large ones. If you overdraft on your checking account by writing a check for a sum larger than your balance, it could result in a bounced check and additional fees.
They can do this every time you make a charge over the amount in the account. So, say you've got $50 in the account, and you use your debit card once for $60 and once for $10. Your bank can charge you the overdraft fee twice.
Sucks, doesn't it? Which is why you've got to diligently keep track of what's in your account. Write down everything in your balance ledger (or just keep a close eye on the account online). And don't forget to figure in any automatic payments you may have set up--or outstanding checks that haven't been cashed yet.
If you do overdraw, the only thing you can really do is put money in it ASAP (enough to cover the amount you went over plus the fee) so that you don't get charged any more. Some banks will even charge you every day you have a negative balance. If you're lucky and you catch it right away, your deposit might even make it in before the charge applies (but I wouldn't hold my breath).
Most banks offer what they call overdraft protection, or what I call a big fat scam. Some of them are set up like mini insurance policies--you pay a few dollars every month as insurance in case you overdraw, and then if you do, the bank won't charge you. This is often set up as a line of credit--the bank gives you a certain credit limit and if you overdraft, the remaining amount after your account balance hits zero is charged to this line of credit. This is a loan, and you'll have to pay interest on it the same as you would a credit card balance. Also, most banks still charge a fee (albeit a smaller one) every time the line of credit is used (every time you overdraft). Alternatively, some banks charge a monthly fee simply for the line of credit service, whether you use it or not.
Another kind of overdraft protection some banks offer is to link your account to another account at the same bank or to a credit card, so that if you overdraft, the bank can just transfer the required amount from the linked account so that your balance doesn't hit zero. The problem with these programs is that the bank usually charges a transfer fee, which while usually less than an overdraft fee, is still a fee and still sucks.
As far as I'm concerned, these forms of "protection" are hardly worth it when you consider the amount of fees associated with them. Still, it's a good idea to finding out what your bank offers as far as these programs; it's possible they might offer a good deal--but your best bet is probably just to be careful and make sure you keep a little padding in your account.
See also: credit unions, CDs, savings accounts, checking accounts
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