Q:

What is overdraft protection?

A:

Quick Answer

According to Bankrate, overdraft protection is a service that banks offer which covers purchases made when a customer's account is in the negative. It is essentially a short-term loan that typically carries a fee.

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Full Answer

About.com explains that overdraft protection connects a customer's checking account to a savings account, a line of credit or a credit card that is tapped to pay for purchases made when the checking account lacks sufficient funds. Linking overdraft protection to a credit card is risky because some credit card companies treat overdraft payments as cash advances. Cash advances frequently come with higher interest rates, fees and no grace period. In such cases customers sometimes pay more for overdraft protection linked to a credit card than they do for overdraft fees. Some of these risks exist for lines of credit, as well.

Bankrate explains that banks and credit unions offer varying terms and fees for overdraft protection, some better than others. Because of some questionable practices regarding overdrafts on the part of the banks, related consumer protection laws have been developed. As of October 2014, banks must ask customers to opt into overdraft protection programs. People who do not have overdraft protection for a purchase may be assessed an insufficient funds fee by a bank and may have to work with the merchant to complete the transaction.

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