Q:

What are the advantages and disadvantages of bank overdraft protection?

A:

Quick Answer

Overdraft protection helps consumers temporarily cover purchases when an account is not sufficiently funded, but these services come with hefty fees that increase debt, according to Bankrate. Overdraft fees typically range from $10 to $35, and many financial institutions may even issue costly charges for small, inexpensive purchases.

Continue Reading

Full Answer

Overdraft protection may be offered as a line of credit, or consumers can link multiple accounts as backup payment sources. As of July 2010, Federal Reserve laws prevent banks from automatically enrolling clients in overdraft programs, says Bill Hardekopf on Forbes.com. Many customers voluntarily choose the service to avoid being declined in public settings and fund emergency purchases like auto repairs. Overdraft funds can also provide short-term income between paychecks as an alternative to payday loans.

Opponents believe frequent reliance on overdraft protection may prevent consumers from learning to balance accounts and budget money, says Bankrate. When overdrawn charges are continually approved, consumers also run the risk of making several purchases over a short time period, potentially resulting in hundreds of dollars in fees.

A research survey reported that financial institutions collected $32 billion in overdraft fees in 2012, according to Hardekopf. Out of 38 million checking accounts included in the survey, researchers estimated that 26 percent of account holders repeatedly used overdraft services.

Learn more about Bank Accounts

Related Questions

Explore