Wednesday, August 12, 2009

Overdraft Privilege programs

When you offer checking accounts, there are times when items are presented for payment on an account that does not have sufficient funds to cover the item. This is called an overdraft. What happens when you have an overdraft? It really depends on what the credit union member has done in advance to prepare for this overdraft situation. The recommended course of action is to request an Overdraft Loan for the checking account. If a check is presented for payment on the account and there is not sufficient funds to cover the check amount, an Overdraft Loan will pay the check amount up to the approved limit on the Overdraft Loan. There is a small fee for the transfer and daily interest on the loan until the balance is paid. Members can also establish automatic share overdraft sources from other savings accounts within the credit union.

If there is not an Overdraft Loan or automatic share overdraft source on the account, the credit union has a dilemma on its hands. Does the credit union return the presented item for payment or pay the item? If the item is returned, an non-sufficient funds (NSF) fee of $25 will be charged PLUS the member will most likely receive a returned check fee by the vendor or merchant who accepted the check initially. A $50 check can quickly cost $100 or more if returned. Overdraft Privilege programs allow the credit union to cover (pay) the presented item up to a certain amount, but still charge the $25 NSF fee for the overdraft. This saves the member the returned check fee from the vendor or merchant PLUS avoids the embarrassment of a returned check item. The objective of Overdraft Privilege programs is to provide a safety net should an unexpected overdraft occur. Overdraft Privilege is not a loan though and should not be considered a line of credit. Overdraft Privilege is MORE expensive that traditional overdraft loan protection. This is why members are encouraged to apply for traditional overdraft loan protection to provide a more economical safety net should a mistake or emergency situation create an overdraft. Members are also encouraged to utilize the free services of home banking and 24-hour audio response to monitor their account balances and history.

Overdraft Privilege or "courtesy pay" programs have taken some heat in national news media articles recently. Much of the concern with Overdraft Privilege programs seem to center around the availability of access with VISA debit cards and ATM's. North Alabama Educators Credit Union does not provide access to Overdraft Privilege through these electronic channels. Our program provides for coverage of items already written or authorized by electronic draft. If these items were returned, the member would have expenses from the merchant or vendor associated with the item being returned. This can not be said for a denied VISA debit or ATM transaction.

In the end, it really is the member's responsibility to monitor their own accounts and prevent overdrafts when possible. Overdrafts do cost money. Members are encouraged to stay within their available balances and avoid costly overdrafts.

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