What is an overdraft account?
An overdraft occurs when there’s not enough money in your account to cover the amount of a withdrawal. If several transactions are going through your account at the same time—rent or mortgage payments, debit payments for gym memberships and your new cellphone purchase, for example—and you don't have enough funds, your account becomes overdrawn.
Whether your personal finances are rock solid or not, overdraft protection is recommended to avoid fees and give you peace of mind. Being short on funds can happen to anyone.
How does overdraft protection work?
For example, if $250 is debited from your account, but you only have $100 in the bank, you’re short $150. This is where overdraft protection comes in. Let’s see how it works.
Overdraft protection—also known as an integrated line of credit or overdraft line at some financial institutions—protects you if there isn’t enough money in your account. The transactions are covered anyway. They won’t be rejected, and you won’t have to pay additional fees. In short, it’s a simple way to deal with the little unexpected things in life.
What types of protections are available?
There are generally 2 types of overdraft protection:
- The first allows transactions in your account up to a certain negative limit. If your account balance drops to zero, your bank will cover your purchases, withdrawals, cheques, transfers, and preauthorized payments up to that predetermined limit.
- The second draws the shortfall from other bank products you may have. The funds can be taken from a credit card, a different account or savings product, or a line of credit.
Good to know: Overdraft protection helps cover short-term day-to-day expenses so you can continue to make the transactions you usually do. It is not a credit solution, however. If you’re looking for a long-term credit solution, an advisor can offer other options such as a credit card, line of credit, or personal loan.
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How do I get overdraft protection?
To obtain this type of protection, simply apply for overdraft protection at your financial institution and agree to the related terms, conditions, fees, and interest. If you have any questions or don't know what type of protection to choose, contact your advisor. They can guide you toward the banking service that’s best for you.
And how much does it cost? Fees may be charged monthly or on a per-use basis, depending on the services your financial institution offers. If the protection you choose draws funds from your credit card, be aware that the cash advance interest rate applies, rather than the interest rate for purchases. That also means that interest starts to accrue right away, as you do not have an interest-free grace period.
The cost of this type of protection is generally much lower than paying a fee for insufficient funds. This is just one of many tips to help you reduce fees.
Why get overdraft protection?
There are several reasons to get this kind of protection. First, you’ll pay less in fees if you’re short on funds in your account. If you write an NSF cheque, you’ll be charged an overdraft or dishonour fee that varies from one financial institution to another. An overdraft fee is the amount your financial institution charges to cover a transaction when you don't have enough money in your account. The dishonoured payment fee is the amount your financial institution charges for each refused payment. This fee is generally $45 for each NSF, but it can be as high as $65. This is the fee overdraft protection helps you avoid.
Another reason: your transactions won’t be rejected. You have no transaction to redo, no unauthorized overdraft charge to pay, no inconvenience.
You'll also have peace of mind knowing that you're not going to run into any day-to-day surprises, especially if you don't keep track of your account transactions on a regular basis. With all the monthly bills to pay, such as rent or mortgage, electricity, cell phone, not to mention other one-time bills like municipal taxes or school fees, it's easy to lose track. And the amount you have to pay can add up quickly.
How do I pay off an account with a negative balance?
If you have an overdraft up to a certain allowable negative balance, each deposit of funds into your account will be used to pay off the overdraft. For example, if you have a $100 overdraft and you deposit $200, you will end up with $100 in your account (before overdraft protection fees and interest, if applicable).
Check with your financial institution to discuss repayment terms based on the type of overdraft protection you have.
Want to terminate your overdraft protection? It’s easy. All you need to do is ask your financial institution.
While convenient, overdraft protection is only to be used when an emergency or unforeseen event occurs. It’s not a credit product, like a line of credit. Contact your advisor for more information about protections or credit solutions. We’re here to answer your questions.