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What is an Overdraft Transfer?

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  • Written By: Troy Holmes
  • Edited By: W. Everett
  • Last Modified Date: 02 November 2016
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The term overdraft refers to a situation in which a bank check is refused due to insufficient funds in the bank account. An overdraft transfer is a process in which money is transferred from a separate account into the checking account with insufficient funds. This process can be setup to run automatically. It is a financial safeguard that ensures adequate money will be available for checks in the event that an overdraft occurs.

Most financial institutions charge customers a modest fee for overdraft transfer protection programs. These range in price but are typically less expensive then the fees associated with bouncing a check. Setting up this type of transfer program requires a customer to place funds into a secondary holding account. This is typically a savings account from which money will be automatically transferred in the event of an overdraft in the primary checking account.

Many banks offer several overdraft protection plans to customers. One example is an overdraft credit line. This is similar to a credit card, which has limits and interest rate fees. Overdraft protection is different then overdraft transfer program. Transfers require deposited funds from a secondary account, whereas credit lines are based on a loan.

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The United States has laws regarding overdraft protection programs and checking accounts. These laws were enacted in 2010 as a means of protecting the public against exorbitant fees charged by financial institutions. Since these laws took effect, overdraft protection must be requested by the customer before it can be exercised. This ensures the customer is aware of the policies and charges for overdrawing account before he is charged overdraft fees.

It is important to remember that an overdraft transfer service does have limits and should not be considered approval to write bad checks. This service will only cover a limited overdrawn amount. This is based on either approved credit lines or available funds in a secondary account. If the overdraft is higher then the available limits, the check will be returned due to insufficient funds.

A bank overdraft typically does not affect an individual’s credit rating. If the debt is minimal, and settled in a timely manner with the financial institution, an overdraft is typically a mere inconvenience. The overdraft transfer is a simple method of avoiding overdraft fees but not necessary if these overdraft situations are rare. Most banks will provide a customer with automatic overdraft protection but will charge a fee for processing the check. Additional fees may be incurred if the account remains in a negative balance.

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