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What Is Overdraft Protection?

An overdraft results when an account holder takes out money from the bank when his account does not have enough funds to cover the withdrawal. In most cases, this happens when an account holder has issued a check and there are not enough funds in the current account to cover the amount written in the check. Depending on the policies of the particular bank, the issued check may or not be honored in this situation. One scenario is that the check will simply bounce and the person the check was issued to will not receive any funds. Another scenario is that the bank may honor the check anyway by releasing the funds. Either way, the person who issued the check will be penalized for the matter. The fees or charges associated with bounced checks vary depending on the bank.

Overdraft protection is being offered by some banks in an effort to address the problems that customers encounter due to bounced checks. The idea behind overdraft protection is rather simple. If you have overdraft protection, the bank will give you a limit as to how much you can overdraw your account. This means that checks issued by you will always be honored as long as the amount does not exceed the limit the bank has set. This can be convenient if you suddenly find yourself a little short on funds at some point and you have a issued a check. The problem with overdraft protection, however, is that while the check is honored, you will still be charged fees for overdrawing your account. More so, you have a limited number of days to replace the overdrawn amount. Otherwise, you will be charged interest on the amount that you now owe the bank.

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