Do You Really Want Overdraft Protection?

One of the provisions of the new rules dealing with plastic states that you have to opt in to overdraft protection from your bank. These rules state that your bank has to get you to opt in by August 15, 2010 for existing accounts. July 1, 2010 is the deadline for those opening new accounts. This isn’t the type of “overdaft protection” offered in your bank’s literature. This is the overdraft “protection” that many banks automatically extend, allowing between three and 10 transactions to go through if your account is overdrawn.

While this type of transaction can save you some embarrassment, since you won’t be rejected immediately, it can also cost you a great deal of money — anywhere between $27 and $35 (or more) per transaction. And, since your bank isn’t required to tell you when you go negative, the transaction fees can pile up until you notice. Or until your “protection” runs out and you are finally rejected. By this time, of course, your fees can be in the hundreds of dollars.  Starting this summer, you will have to opt in to such programs; otherwise, any debit card transaction you do not have funds for will be summarily rejected. If it is not, and you have not opted in, the bank can’t charge you fees. (Note that this rule does not apply to online banking payments or checks. These can still go through and result in fees.)

There are “overdraft protection” programs offered by banks. These programs are actually similar to lines of credit. You pay an annual fee, and you are assigned an interest rate. If you go beyond your account balance, the amount is seen as a loan, and you are charged interest on it until it is paid off, and your balance is back in positive territory. Depending on your interest rate and annual fee, this can be less expensive if you regularly overdraw your account.

Options beyond overdraft protection

Of course, your best option is to avoid any sort of need for overdraft protection. Get some financial software and keep track of your spending. When you use the debit card, save your receipts, and enter the amounts into your financial software or checkbook register. Keeping track this way, and making sure you are within budget, is the best way to avoid fees related to overspending your account. Other options include:

  • Link your checking account to another account, such as savings or a credit card. If you don’t have the funds, money is transferred from another account. However, it is important to note that there are still transaction fees of between five and 15 dollars for these types of arrangements. (But it’s better than paying upwards of $27.)
  • Get alerts. Some banks will send you a text message alert if your account balance falls below a certain point, letting you know that you are close to overspending.
  • Keep a cash cushion: Some people have an invisible “cash cushion” that isn’t counted in their budgets or bookkeeping to serve as something of a cushion.

In the end, though, you are better off tracking your spending, and checking your account regularly in order to avoid overspending.