The Pros and Cons of Overdraft Protection

There are definitely some pros and cons regarding overdraft protection. First we will define overdraft protection and then first we will look at the pros. What is overdraft protection? Let’s say you have $50 remaining in your checking account. Now you write a check for $75 to pay a creditor. You have just overdrawn your checking account by $25. If you have overdraft protection the $25 will be pulled from your overdraft line of credit and the check will be paid.


1. When you have overdraft protection it keeps you from receiving a returned check fee of $32 or whatever the fee is at your particular bank.

2. Overdraft protection provides peace of mind knowing that you won’t receive a return check fee.

3. Sometimes you can borrow against your overdraft fee – it’s an additional loan

4. The line of credit you receive can probably be as low as $200 or as high as $3,000 or higher it all depends on your individual credit and situations. The entire credit line can be used to cover return checks.

5. You can payoff the entire balance on your line of credit any time.

6. The overdraft payments are pulled from your checking account monthly in small increments of about $20 or 3% whichever is lower. This is how it is paid.


1. With overdraft protection your interest accrues daily at an annual percentage rate as high as 18% or 19%. This can be expensive.

2. If you need the overdraft protection say to cover $45 of overdrawn checks some banks are set up to allow the overdraft amount to be drawn only in increments of $100. The additional funds you don’t need will be accruing finance charges daily at the high interest rate.

3. Sometimes if you have a low line of credit for your overdraft protection say $200 and you need $300 to cover your returned check charges then it won’t work for you . You again incur return check fees. The overdraft protection is actually nullified in this case.

4. You have to be approved for overdraft protection just like any other credit product. A representative at a financial institution has to take an application and take a look at your credit report to determine if you are credit worthy. So it is not guaranteed that you will receive it.

5. There is normally an annual fee of $20 or $25 for an overdraft account whether you use it or not. Then is amount is pulled from your checking account to pay the overdraft annual fee.

6. If you have a checking account and you want to close it or cancel it you must pay any amount still owing on your overdraft account before you can do so.

In light of these facts you have to determine is it beneficial to you to open an overdraft account. Do the pros out weight the cons or vice versa. You will have to look at your own individual situation to see if it is beneficial to you.