Understanding Overdrafts

By Remitbee - Apr 19, 2022

Have you experienced getting your bank statement for the month and encountered overdrafts? What is exactly?

Overdraft means having your bank account balance dip below zero. And despite it giving you extra fees, it can also be advantageous as it lessens the hassle of getting your cards declined whenever you're paying for something. It occurs in many kinds of scenarios!

For example, when you open a checking account, there may be times when you lose track of your balances, especially if you have multiple accounts for your business. With that, you may write a check against an account that doesn't have enough balance to pay for that amount. You may also be a Netflix or Spotify subscriber, and with the periodical fees charged to your account, overdrafts may often occur.

Overdraft Protection - How does it work?

Losing track of your balances typically declines debit cards, unnecessary debts, or overspending. It's almost the same as getting shocked by the end of the month on how much you've spent with your credit card. You may want to set protection to let you go beyond your account's balance, avoid spending less than what you have or fund your bills using your other accounts.

As the word suggests, overdraft protection protects your financial transactions charged to your bank account. When you're about to pay less than what's in your account, your bank can cover and arrange things for you. Of course, that will cost you some fees, but that's certainly cheaper than the hassle NSFs may cause later!

Overdraft Interest

Banks charge interest in every transaction carried out with your overdrawn account. Overdraft interest is calculated based on the total amount of your "negative balance" or the deficiency of your expenses with your account's balance.

The amount overdrawn will be divided by the duration of every billing (meaning 30 if your bank bills monthly). The result will then be multiplied by the interest rate set by your bank and then divided by the number of billing periods each year. Typically, the interest rate ranges from 19 to 40 percent, so ensure that you check on your bank.

Overdraft Fee

Aside from the interest, your bank may also charge you an overdraft fee. And unlike interests, it's typically fixed and easier to calculate. But as with overdraft interests, prices depend on which bank your overdrawn account is. On average, overdraft fees cost around $35, but some banks may charge as low as $10, while others may go as high as 40$ every transaction.

RBC Overdraft

The RBC Royal Bank lets its account holders get protection from $500 to $5,000 for a standard account. But for those who hold RBC's VIP account, you can have up to $10,000 worth of overdraft protection.

Even better about RBC is that their protection policy takes effect automatically once you reach your account's limit amount. You can also pay for the overdraft quickly, as they deduct the amount and corresponding charges on your next deposit.

You may check your overdrafts quickly by logging in to your RBC account online. Applying for overdraft protection and increasing/decreasing the policy is convenient as you can also do it online.

TD Overdraft

TB Bank offers three kinds of overdraft protection. Their standard overdraft service is like the ordinary transaction when your debit card is declined due to insufficient funds. But if you want to eliminate the hassle of those declined bills, you may get TD's debit advance service to temporarily let the bank cover your insufficient funds. The third option, savings overdraft protection, allows TD to deduct your overdrafts from your savings.

TD charges every overdraft $35, and you can have three daily overdrafts for every account. You also can get notified when your overdraft reaches $100, $300, or $500. But what's even better with TD Bank is that they don't charge any fees for overdrafts below $50.

CIBC Overdraft

CIBC's overdraft protection policy is simple. It sets the overdraft limit from as low as $100 up to the highest limit of $5,000. You may choose within that range how much you'd like CIBC to pay for your no-sufficient-fund (NSF) payments.

CIBC charges overdrawn accounts with $5 fees every month regardless of how often you overdraw. For those who'd like to create overdraft protection or who have an existing overdraft policy that you'd like to increase, another $5 should also get paid.

BMO Overdraft

BMO provides overdraft protection from $250 to $2,500, offered in standard or occasional plans. As with CIBC, BMO also charges users $5 every month for standard protection holders. Meanwhile, for those who opted for occasional protection, instead of paying $5 monthly, the fees will be charged for every transaction.

BMO also offers an overdraft transfer service, which moves your fund from your other BMO account to avoid negative balances.

Scotia Overdraft

Scotiabank offers clients to apply for overdraft protection from $250 to $5,000. Their framework works like that of BMO. They provide a monthly fixed plan and pay-per-use overdraft protection.

Like BMO's standard protection, Socia's monthly overdraft protection plan is perfect for those who often go into overdrafts. They charge $5 monthly fixed fees and 21% overdraft interest per year. On the other hand, pay-per-use works like how BMO's occasional overdraft plan does. It charges you $5 for every overdraft committed plus a 21% annual interest.

Final Thoughts

No one likes overdraft costs, but sometimes it can be hard to stay within our means. Lucky for you, there are many ways to cut back on spending and live on a budget.

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