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Overdraft Protection: The Real Pros and Cons

Overdraft protection is a service provided by financial institutions that allows checking account holders to make debit card purchases or pay a check even if they do not have enough money in their account. An overdraft account functions almost exactly like a credit card or revolving line of credit. It can be a simple convenience or an unhealthy financial lifeline. If used correctly, it can be a great idea. However, there are some real pros and cons when using this service on your checking account.

Pros of Overdraft Protection

  • Eliminates embarrassment at the checkout line: This service will pay a check or allow a transaction to go through even if you do not have enough money in your account. This service will eliminate the embarrassment of the item being returned or the transaction being declined. The transaction will be paid, including the overdraft fee.
  • Cash available for emergencies: You can get access to the cash you need in an emergency situation like a flat tire, running out of gas, home repairs, or minor medical expenses.
  • Cash available in between paychecks: If money is tight in between paychecks, you will have access to money to get you through the next payday. This temporary access to cash can be helpful during a financial gap due to an unexpected expense.

Cons of Overdraft Protection

  • It’s expensive: The Center for Responsible Lending notes that research from Moebs Services Inc. showed that, in 2013, the median overdraft fee customers faced was $30. Financial institutions took in $31.9 billion in overdraft fees. If you’re not careful, just five small transactions approved on an overdrawn account per year could cost you $150 or more.
  • It encourages overspending: Although considered a convenience, this service often takes away the responsibility of paying attention to account activity and availability of funds. This service may cause you to overspend because it may allow you to spend what you don’t have.
  • It can be addicting: Most habitual users of this service eventually feel like they can’t live without it. Excessive use of the service may cause you to have significantly less available in your checking account because your deposit may be eaten up by the overdrawn amount plus the overdraft fees. This service may not leave enough in your account to live on until your next paycheck, which may increase your reliance on this service to fill in the financial gap.

Easy Checking Account Management Tips

  • Pay attention to your account: Most people don’t use checks anymore, but that doesn’t mean you don’t still have to balance your checkbook. Pay attention to your account and make sure you have enough to cover your purchase before you go to the store or checkout line.
  • Use technology: Most financial institutions have apps or at least provide online access to your account. Online or mobile banking apps can help you keep track of your spending and account balance. It can also allow you to set alerts when your account reaches a certain balance or when a fee is charged.
  • Avoid overdraft protection temptation: If you feel that you’re not disciplined enough to use this service responsibly, ask your financial institution to turn it off for the checking account you use the most. Turning off the overdraft protection for debit card transactions may save you lots of money over the year.
  • An alternative offered by many banks allows you to connect your checking account to your savings account. If the checking account is overdrawn, funds are moved from savings to cover the transaction. This typically has much lower fees (less than $10 in many cases) and eliminates interest on overdraft funds accumulating.

Image source: Flickr

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