LOUISE FAIRSAVE: Overdraft protection
Anyone can make a mistake about the balance remaining on their chequing account and so overdraw the account.
Imagine the embarrassment when the payee calls you in order to refer to the drawer of the cheque. Overdraft protection on your chequing account will save you from such embarrassment within set limits.
Overdraft protection is a service provided by a financial institution like a bank or credit union. It allows the customer to complete a payment transaction with a cheque or debit card that overdraws the related bank account, provided the overdrawn amount is within the allowed limit of the overdraft.
For example, say you go supermarket shopping and your bill totals $436. However, the chequing account to which your debit card is linked only has a $212.06 balance. Unless you have overdraft protection, that transaction would be declined.
However, if you know that you are lax in keeping track of your account balance, you could have pre-arranged overdraft protection for such overpayments. With overdraft protection, your bank would have covered the excess of your account balance, providing the additional $223.94 as a short-term loan.
In this case, you could set your protection for say $1 000 or more depending on the likely amounts you might overdraw your account by. The supermarket would have no idea of the fragility of your finances.
Originally some financial institutions would provide overdraft protection as an add-on service, particularly for high-value clients. In more recent years, the service is provided at a cost. The cost may be a fee or an interest charge for the loan extended by the financial institution in meeting your overdrawn amount or both.
Some people cannot be bothered to keep close track of their account balances. Then, others cannot find the time to reconcile their various bank accounts in order to assess the balance available.
They may actually see overdraft protection as a way of finding additional time to earn more.
For those who effectively have the funds and just not the time to keep reconciling their account balances, they may seek a better financial alternative solution.
They may protect themselves by arranging with the related financial institution to link any such overdrawing to their savings account or another chequing account which would have the needed funds. This is a recommended alternative to incurring cost for an overdraft service you effectively do not need.
Overdraft protection is optional; you must explicitly seek to arrange it. To use the facility often, though, shows that you are not managing your cash effectively.
Especially in today’s digital environment that allows you to check your account balances regularly through online banking and mobile banking, this is a service cost you can avoid.
Before you go into the supermarket or store, you can check your account balances and work within the limit of the funds available to you. You may transfer funds from one account to another in order to make more funds available for shopping.
Depending on the service you select, overdraft protection can be expensive, particularly if your spending habits are out of control. It may allow you to be carefree about keeping track of your spending, yet avoid the embarrassment of bounced cheques which would tarnish your credit profile, but at a high cost.
Good personal financial management particularly requires you to keep accurate tabs of where your cash is going and trying to hold on to as much of it as possible.
Yet, overdraft protection can come in handy for short-term use during a difficult financial time or during a brief period of financial stress.
• Louise Fairsave is a personal financial management advisor, providing practical advice on money and estate matters. Her advice is general in nature; readers should seek advice about their specific circumstances. This column is sponsored by the Barbados Workers’ Union Co-op Credit Union Ltd.