Overdraft
[[Image:Overdraft - Punch cartoon - Project Gutenberg eText 16113.png|thumb|\"I warn you, Sir! The discourtesy of this bank is beyond all limits. One word more and Iâ€"I withdraw my overdraft.\"
Cartoon from {{w:en:Punch (magazine)|Punch Magazine}} Vol. 152, June 27, 1917]]An overdraft occurs when withdrawals from a bank account exceed the available balance;
i.e. over-drawings. This gives the account a negative balance and in effect means the account provider is offering
credit.
If there is a prior agreement with the account provider for an overdraft facility, and the amount overdrawn is within this authorised overdraft, then
interest is normally charged at the agreed rate. If the balance exceeds the agreed facility then fees may be charged and higher interest rate might apply.
Most overdrafts due to customer error are due to the customer forgetting a bank delay in check deposits, forgetting Automatic Withdrawals for various bills, or simple ignorance of their actual account balance.
Bank policy greatly affects the bank\'s ability to charge overdraft fees. Some banks alter the order in which transactions are applied during the day to maximize overdraft fees. For instance, if there is $100 available and withdrawals in the amounts of $1, $5, $7, $10, and $105 are all posted in the same batch, many banks will post the larger withdrawals first, causing 5 overdraft fees. In contrast, if these withdrawals are applied in the order above, only the last withdrawal will overdraft, and only one fee will be assessed.
Some consider overdraft charges to be unethical in the case of
electronic funds transfer,
debit card,
credit card or other transactions electronically authorized by the bank or other financial institution. Bank policy determines when a bank will authorize a transaction, and many banks permit transactions far in excess of the available account balance.
Many see this practice as a type of
predatory lending by allowing consumers to spend money that they do not have. Although traditional overdraft lines of credit are loans, federal regulators do not consider modern \"discretionary\" overdraft protection programs to be loans because banks reserve the right to refuse to cover an overdraft at any time and for no reason at all. Recently, Congressional efforts have been made to bring overdraft charges under the requirements of the Truth-in-Lending Act (TILA). This would require more detailed disclosure of the terms of overdraft protection programs.
Banks in the UK often offer a basic overdraft facility, subject to a pre-arranged limit (known as an authorised overdraft limit). However, whether this is offered free of interest, subject to an average monthly balance figure or at the bank's overdraft lending rate varies from bank to bank and may differ according to the account product held.
When a customer exceeds their authorised overdraft limit, they go into unauthorised overdraft. Exceeding their authorised limit often results in the customer being charged one or more fees, together with a higher rate of lending on the amount by which they have exceeded their authorised overdraft limit (the unauthorised overdraft interest rate). The fees charged by banks can vary.
A customer may also incur a fee if they present an item which their issuing bank declines for reason of insufficient funds, that is, the bank elects not to permit the customer to go into unauthorised overdraft. Again, the level and nature of such fees varies widely between banks.
In
2006 the
Office of Fair Trading issued a statement which concluded that credit card issuers were levying penalty charges (penalty charges - also know as liquidated damages clauses - are void in UK contract law unless they represent a genuine pre-estimate of the cost of a breach of contract) when customers exceeded their maximum spend limit and / or made late payments to their accounts. In the statement, the OFT recommended that credit card issuers set such fees at a maximum of 12 UK pounds [
1].
In the OFT's statement, the OFT indicated that it thought the fees charged by credit card issuers were analogous to unauthorised overdraft fees charged by banks. Many customers who have incurred unauthorised overdraft fees have used this statement as a springboard to sue their banks in order to recover the fees. It is currently thought that the England and Wales county courts are flooded with such claims [
2]. Claimants tend frequently to be assisted by web sites such as the
The Consumer Action Group. To date no bank has appeared in court to justify its unauthorised overdraft charging structure and many customers have recovered such charges in full [
3]. Some banks have responded to such actions by closing customer accounts, on the basis that those accounts have not been operated within the terms and conditions [
4] which the customer consented to when the account was opened.
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Current accounts*
Overdraft protection - US accounts
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Banks
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Building societies*
Credit*
Authorization hold
