What is Overdraft Protection?
(Part 2 of 3)
In part one of “What is Overdraft Protection?” we reviewed how overdraft protection can actually be a few different types of services offered by a bank.
A formal overdraft protection “program” that allows overdrafts and charges overdraft fees.
Overdraft protection from another account. .
Overdraft protection from a line of credit.
I explained an overdraft protection program in the part 1 of “What is Overdraft Protection?”. If you need to learn about an Overdraft Protection Program, please see the prior post. This post talks about overdraft protection from another account. Part three explains overdraft protection from a line of credit.
Overdraft Protection from another Account
This type of overdraft protection is exactly what it sounds like, but works in a very specific manner that everyone should understand. This type of service is usually called an “Overdraft Sweep”, because two accounts are connected and one sweeps funds into the other account, if an overdraft occurs. For example, let’s assume you have a checking and a savings account with a bank. If you enroll in overdraft sweep protection between the accounts, any amount you are in overdraft in your checking will “sweep” in from your savings account to cover the overdraft amount. Of course, this only happens if you have enough money in the savings account to cover the overdraft!
The most common complaint I hear about this service is that it’s no help for the customers who overdraft the most – and that’s 100% correct! If you’re the type to live paycheck to paycheck, always a couple of bills behind, and overdraft your account constantly – you probably don’t have a savings account. If you had enough money to have a separate savings account, you probably wouldn’t overdraft so much in the first place! The overdraft sweep protection service is most beneficial for the bank customers who may accidentally overdraft their checking on a rare occurrence. The sweep acts like a safety net, just in case something extraordinary happens on their checking account. Usually they can cover their bills without a problem, it’s just a matter of planning better. For those of you who may use overdraft sweep, a couple of important points to know:
The bank will usually charge you a lower per day fee whenever the sweep is needed. My bank charges $5 per day used. If the sweep isn’t needed, there is no daily cost. On the days it’s needed, it’s only $5 per day, no matter how many overdrafts payments need to be covered by the sweep. That will save big money on overdraft fees!
The second point is really important to understand – the sweep only works in batch or total dollars. This means your savings account must have enough funds to cover all overdrafts for a particular day, plus the $5 fee, or no money will sweep into your checking account. I know that may sound confusing, so let’s review an example. Using the same example as in part one of this post, let’s say the below three payments come into your checking and place you in overdraft $170. Your savings account must have at least $175 ($170 + $5 sweep fee) for any money to be transferred into your checking account. If you have less than $175 in your savings, no money will sweep into your checking and you’ll get an overdraft fee on all three payments. Many people think at least some money will sweep to cover the smaller payments, but the system doesn’t work that way. The system will see your checking is overdraft $170 and look to see if the sweep savings account has $175 or more. If so, the money will sweep into your checking. If the savings is less than $175, nothing sweeps into the checking and you’ll get those big overdraft fees!
|Auto Insurance Payment||($150.00)||($100.00)|
|Gym Membership Payment||($20.00)||($120.00)|
|Phone Service Payment||($50.00)||($170.00)|
|Overdraft Sweep from Savings||$175.00||$5.00|
|Overdraft Sweep Fee||($5.00)||$0.00|
In review, this post detailed the type of Overdraft Protection that sweeps money from a savings account to cover overdrafts in your checking account. You need to sign-up for the sweep protection, because the bank will certainly not do it automatically. Overdraft sweep fees are much less than regular overdraft fees, so it will save you money. Finally, we reviewed how it’s important to understand the batching process that banks use to add all overdrafts for a day and then “sweep” that total from your savings account.
I’m Banker X and I’m on your side.
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