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Overdraft Protection -- Is it Worth it?

Times are rough out there. Unemployment has just hit a five-year high at 6.1 percent. The current stock market makes a roller coaster ride seem calm by comparison. These days, we all look for a good deal and hope to protect ourselves until the economy improves. As of late, many banks have contacted their customers to offer something called "overdraft protection." In this month's article we'll talk about whether or not this service is a good deal for you.

  • What is "overdraft protection?" Let's start with the basics. Overdraft protection sounds like a nice, neat safety net placed under your bank account, doesn't it? For instance, let's say you didn?t properly balance your checkbook, or your paycheck got deposited a day late, and you spent more money than you had in your account by using your debit or ATM card. Enter overdraft protection: It's typically marketed as a "convenience" for you. However, what it often ends up being is a way for the bank to make some easy money off of you. How so? This feature comes at a price. Overdraft protection is just a fancy way of saying short- term loan.
  • How much does it cost? Activating your overdraft protection feature on your account will typically run you roughly $30 a pop. If you accidently spend $20 more than you have in your bank account while out shopping, your overdraft protection kicks in. Your check or debit card is accepted, but you'll end up paying $50 for that purchase when you tack on the overdraft fee. The Center for Responsible Lending recently pointed out that roughly 50 percent of overdrafts happen on debit cards. Alas, most debit cards are used for purchases that are less than the average overdraft fee. And the fun doesn't stop there. Once that overdraft feature kicks in, interest charges will start accruing on that "loan" until you replenish your account. Double ouch!
  • Do you have overdraft protection? To top it all off you may have unknowingly been auto-enrolled in your bank's overdraft protection program when you opened your account. So check with your bank to see if the feature is active on your account and what the associated fees are for its use. If you don't want to have it, an alternative is to link your checking and your savings accounts so that if you accidently run over your checking account balance the funds come out of your savings account.

So, is overdraft protection worth it? We'd argue that you can accomplish the exact same thing on your own, at no extra cost, by simply knowing your bank balance. Properly balancing your checkbook is the best protection. As we see it, overdraft protection really just boils down to a (fairly expensive) way to avoid public embarrassment of having a check bounce or your debit card refused. By taking some (inexpensive) personal responsibility, you have the power to prevent these situations from happening in the first place.


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