Let's Talk: Overdraft Protection (ODP)

Overdraft protection (ODP) is an interesting feature. Some hate it, others love it. It really depends on your personal spending habits. ODP is actually a service that you need to qualify for. Most people have a pre-approved offer when they first open their account. The reason why you need to qualify for this service is because you're using credit. If you're deemed as risky, as in have a hard time paying back your debts, you won't get approved for ODP. ODP simply allows you to make purchases or withdraw funds from your account when you don't have enough cash in your account.

ODP is often misunderstood and disliked. I do realize that an ideal situation doesn't exist for everyone and people have bills to pay and mouths to feed. I understand that ODP can be an essential service to help families for a short period of time until their next paycheque comes in. For these people, ODP is important to have. 

How it Works

Let me explain how it works. For a regular account without ODP, if you didn't have enough money and you needed to withdraw at an ATM or make a purchase inside a store, your card would simply decline. However, what if you had pre-authorized payments set up? Things like your gym membership or online subscription services. Each time your renewal for these services come up and you didn't have enough money, your account wouldn't just be declined. You would also be hit with non-sufficient fund (NSF) fees.

These fees are one of the highest banking fees that ever came into existence. Each time I see a client being hit with one of these, I genuinely feel their pain. I believe NSF fees are currently sitting at around $50 and will continue to rise over time. The solution is simple. Have ODP or watch your spending and don't use more than you have. Then you won't have to ever deal with NSF fees.

Types of ODP

If you do happen to use ODP, there are generally 2 main types:

1. Regular - charges roughly $5 per month + interest regardless if you use it or not. This is ideal if you happen to use ODP regularly in a single month. You'll only pay $5 instead of the additional fees each time you use it.
2. Pay-as-you-go ODP - charges roughly $5 + interest each time you go into overdraft. This is ideal if you would like the protection ODP offers for your account but don't use it or you rarely use ODP. In short, if you don't use ODP, you will not be paying any fees. If you use ODP, you will pay fees.

Interest on ODP

Lastly, I want to talk about the interest rates for ODP. The interest charged for using ODP is quite high, hovering just over 20%. This is comparable to the interest rates of credit cards. The interest rates are also annualized. So if you used $100 of ODP, you won't owe $20 in interest unless you owed a balance for the entire year. Depending on whether the interest is calculated daily or monthly, it would be calculated as followed:

Daily - used ODP for 15 days
$100 x 20% x (15/365) = $0.82 interest

Monthly - used for 1 month

$100 x 20% = $20

$20 x (1/12 months) = $1.67 interest

Do you think ODP is right for you? Until next time!