Overdraft Protection: A Wolf in Sheep’s Clothing

August 21, 2008 · Posted in Money 

“Overdraft protection” is a seemingly benign feature your bank likely provides to you with your checking account. With overdraft protection, if you spend more money than your checking account has funds to cover, the bank will allow the purchase and your account balance then goes into the hole. Consequently, your rent check might not bounce if you don’t have the money to cover it. The bank then charges you an overdraft fee for helping you out.

On the surface, that doesn’t sound too bad. After all, if the check you wrote for the electric bill bounces, then you incur a fee from them, still owe the original amount of the payment, incur a fee from your bank, and run the risk of having the utility shut off for non-payment. With overdraft protection in place, the check will clear and you will only incur the bank’s fee.

In that situation, overdraft protection is useful. If you don’t regularly make a habit of overspending, then the help the protection provides on occasion for accidents like that is worth the fee your bank charges. The problem comes in when you have a debit card attached to your account. Most overdraft fees are charged due to debit card purchases, and the majority of them are for small amounts – meaning the amount you went in the hole is often much less than the fee itself. Banks make money off of you in this way, because they don’t deny your purchases with the debit card, even if they’re just digging you deeper and deeper into the hole without you realizing it.

The average overdraft charge in America is 34 dollars. By your purchases not being denied for insufficient funds, you could theoretically rack up several overdraft fees in one day before you even realize your balance is below zero. Furthermore, if you do not deposit more money right away to get yourself back out of the hole, your bank may also charge you additional fees per day until you do, and it can get very expensive.

Overdraft protection can be very useful, when used sparingly and for emergencies only. To avoid falling into the overdraft trap, make sure you are aware of your bank’s policies and keep a close eye on your bank balance so a 5 dollar latte doesn’t end up costing you 40 dollars. It’s also often possible to opt out of the overdraft program, having your bank be set to deny a purchase if there are insufficient funds. If you don’t want to opt out entirely, you can also often attach another bank account that you can draw from automatically if one runs out of money. A little vigilance will save you from costly mistakes.


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