Overdraft protection can be a great feature to have on your checking account, but it can also become costly if it is used too often. Overdraft protection can also lead one to believe that they have more money actually available then there really is.
The pros of overdraft protection.
Many overdraft protection services are offered for ‘free’. That is, you pay no upfront or monthly fee to have access to overdraft funds.
In a pinch, the extra funds that overdraft protections gives the account holder can protect against expensive overdraft fees, bounced check fees, and the frustration of having a debit card transaction declined.
It can also protect against slow to post transactions, such as checks that are not cashed right away or overcharged purchases.
Another pro of overdraft protection is that it not only protects you from bank imposed fees and penalties, but also protects against merchant initiated fees. The most common merchant related penalty fee is the bounced check fee, which can be avoided with overdraft protection services.
The cons of overdraft protection.
Having that ‘extra’ money available can mislead or tempt some people. Many bank accounts may even show your available balance as your actual money plus the overdraft funds which can be very misleading.
If you end up exceeding your overdraft fund limit, not only will you incur penalty fees, but you’ll still be paying the interest rate or fee associated with using the overdraft.
I mentioned one pro as being that these services are generally offered ‘free’. While it is a free service offered by many banks, you do pay when you go over your available funds and dip into the overdraft money.
You’ll generally pay a competitive interest rate on the money you ‘borrowed’ and may also pay a usage fee. Granted, these rates and fees are usually far lower then all the charges you’d incur for say bouncing a check. But ‘free’ overdraft protection is really only 100% free if you never access it.
You should avoid bank accounts that charge upfront, monthly, or annual fees just for the ‘privilege’ to have access to overdraft funds.
You should also avoid relying on overdraft protection funds on a regular basis. If you are regularly going over your actual balance and using these funds, then you might want to reassess your financial situation.
For most people the occasional use of overdraft protection occurs automatically without their immediate knowledge. It helps people avoid the excessive fees associated with going over their available balance and the absurdly high bounced check fees. Most of the time, we dip into these overdraft funds accidentally and are just happy that massive fees were avoided.