Have you ever swiped your debit card and worried that you might not have enough money in your bank account? If this sounds like you, you might want to consider signing up for overdraft protection to save you from such a predicament.
On the surface, overdraft protection may seem like the perfect solution, but the details and reality of the optional banking services leave many banking customers wondering if it’s actually worth it. Explore our handy guide to learn all about overdraft protection, and overdraft fees, and how you can clean up your finances to avoid them altogether.
What is overdraft protection and how does it work?
Overdraft protection is a safety net that helps you avoid overdrawing your account. In short, it’s a type of financial protection that will help float you money if you have insufficient funds. So if If you swipe your debit card or try to get cash out of an ATM, you may be able to do so even if you technically don’t have enough money in your account. It does this by pulling in money or credit from the account that you linked to your checking account when you set up overdraft protection with your bank.
Generally, if you make a purchase with your debit card and don’t have enough funds in your checking account, the purchase won’t go through. This is typically called an overdraft, and signifies that your account balance has dipped below zero and into negative territory. This situation can be embarrassing for you, as well as awkward for the person behind the cash register. It also can be highly inconvenient if you need whatever you’re purchasing now.
This is where overdraft protection comes in. Overdraft protection essentially protects you from overdrafting. So, instead of getting your card declined and leading to an uncomfortable situation, your card will go through like normal – even if you don’t have enough money in your account to cover that purchase.
But overdraft protection comes at a price, specifically, in the form of overdraft protection transfer which can add up quick. So, while overdraft protection, on the surface, can seem like a great solution to a temporary problem, it’s not always all it’s cracked up to be.
If you are interested in this protection, you’ll want to talk to your bank and enroll in the program. Additionally, it’s important to know all the upfront costs such as overdraft fees, credit line limits, etc.
Pros & Cons of overdraft protection
The main pro of overdraft protection is convenience. Overdraft protection allows purchases to go through, even if you don’t have enough funds in your checking account. This can save you embarrassment, inconvenience and time. You don’t have to deal with your card getting declined in public or being unable to access cash when you really need it.
However good overdraft protection seems in theory, it can cost you in the long run. The fees can vary from bank to bank and your financial institution decide what to charge, and you’re usually hit with more than one charge. You can continue getting hit with overdraft fees if your account is overdrawn for an extended period of time. These new fees are called extended overdraft fees and some are charged daily.
We found that consumers can get hit with four to six overdraft fees per day. In some cases, that number can be as high as 12. What’s more, : C consumers who frequently overdraft end up paying more fees than those who do not opt into overdraft protection. In fact, The Consumer Financial Protection Bureau (CFPB) found that frequent overdrafters who opt into this coverage pay nearly $450 more in fees.
On top of that, if you accrue enough overdraft fees and stay in the negative, you’re at risk of account closure. Having your account closed by your bank is a major inconvenience. Just think about all the bills that are connected to that account, or not having access to your money for a period of time.
All of these are major cons of overdraft protection and should be considered carefully.
How Do You Use Overdraft Protection?
If you want to use overdraft protection, first make sure it’s something you’re signed up for. As noted above, your bank must get consent from you first to enroll you in overdraft protection.
Once you are enrolled, see if you have to link another account or a credit card to complete the process. Each bank may have different policies and procedures.
When it’s set up, overdraft protection will be in place if you overdraw your account. But remember: The hope is that you never have to use it! If you do, this means you’ve run out of money in your account, which is no fun.
Overdraft Fees Are Costing Americans Big Time
Overdraft fees – by and large – are a big business for many banks. In fact, the average overdraft fee is around $35. In 2017, consumers paid 34.3 billion dollars in overdraft fees in 2017, a number which has been on the rise since the Great Recession.
Even credit unions, which are often thought of as more community-minded and consumer friendly have jumped on the overdraft fee bandwagon. Overdraft fees at credit unions have nearly doubled from $15 in 2000 to $29 in 2017.
In short, overdraft fees are the bread and butter for many financial institutions. They give banks a way to make money off consumers by positioning overdraft protection as a useful service.
Does Overdraft Protection Hurt Your Credit?
As noted above, in some cases your bank may offer you a line of credit or link your overdraft protection to a credit card. If linked to a credit card, you could end up paying more. Why? Because some card issuers might consider the overdraft a form of “cash advance,” which has its own set of fees, not to mention higher interest rates.
How Do You Avoid Overdraft Protection?
Before 2010, many consumers were unaware that they were being “opted in” to overdraft protection programs. However, starting in 2010, federal regulations shifted and required that banks get consumers’ consent to opt into overdraft protection.
To make things simple, however, you can avoid overdraft protection by not signing up for it with your bank. If you’re currently enrolled in this service, you can cancel it. This way, if you don’t have enough in your account, your purchase or transaction will get declined. While you won’t be able to make the purchase, you also won’t be hit you with an overdraft fee.
Another option is to open a bank account at Chime, which has no overdraft fees.
Lastly, to avoid this problem altogether, keep a buffer of money in your checking account. This can help you avoid dipping into the negative. Check your account balances daily and monitor your bill due dates and auto-drafts. This way you’ll know when money is coming out of your account.
There are certainly pros and cons with overdraft protection.
It can be convenient, yet costly. It can save you embarrassment and time, but also take a bite out of your hard-earned money. So, weigh these pros and cons carefully.
Final tip: If you never want to worry about an overdraft fee again, consider switching to a bank that offers fee-free overdraft.