Overdraft Protection: The Real Pros and Cons
- Madam MoneyBy
October 16, 2020
- 2 Comments
Nobody is perfect, and sometimes mistakes happen with your checking account. If you’ve ever miscalculated and overdrawn your account, most banks and credit unions offer overdraft protection that allows you to cover transactions you’ve made even if your account doesn’t have the funds available. Depending on how your account is set up, overdraft protection can move funds from a linked savings or checking account to cover the transaction, or it can function almost exactly like a credit card or revolving line of credit. While it can be a lifesaver in an occasional miscalculation of your balance, it can also become an unhealthy financial habit. There are some real pros and cons when using this service.
Pros of Overdraft Protection
- Eliminate potential embarrassment at the checkout line: If you don’t have the funds in your account, the transaction will still go through and eliminate the embarrassment of the item being returned or the transaction being declined.
- Cash available for emergencies: You can get access to the cash you need in an emergency situation quickly and easily.
- Avoid Returned Check Fees: Avoid penalties or fees from a store or creditor that would have applied if you didn’t have money in your account to cover the transaction.
Cons of Using The Service
- There are Fees Attached: It’s rare for financial institutions to offer overdraft protection without charging fees. These fees both create a source of revenue for the bank, and serve as a deterrent to people abusing the service. Fees can be costly and run anywhere from $10 to $35 per transaction. It can put a big dent in your monthly budget if you aren’t careful and use the service frequently.
- It encourages overspending: Although considered a convenience, whether the money comes from another account you own (like a savings account) or if it’s a line of credit with your bank, the service often takes away the responsibility of paying close attention to account activity and availability of funds. It may cause you to overspend because it enables you to spend what you don’t have.
- It can become a harmful cycle: 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.
There are better ways to manage your money, plan for unexpected expenses and ensure that you’re up to date on your account balances than using overdraft protection to bridge any gaps.
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 balances 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 online access to your account. Online or mobile banking apps can help you keep track of your spending and account balance anywhere you go. 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.
- Use savings instead of credit: Rather than using overdraft protection as a line of credit, consider connecting 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 fees.
The team at CESI is committed to helping you make wise financial decisions and to helping you understand how to get out, and stay out of debt. For a free debt analysis, contact us and find out how we can help.