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Should You Spring for Overdraft Protection?

by Miranda Marquit

We often hear that one of the biggest drains on wealth is paying fees. I can’t think of anyone who likes paying fees. For those who follow sound principles of money management, fees shouldn’t be much of a problem. After all, when you are living within your means, you shouldn’t have to worry about fees, right? No need for overdraft fees, since you never overdraw your account.

do you need overdraft protection?This is what I thought until a couple of weeks ago. My finances have a lot of automation to them, and sometimes I don’t go in and double check to make sure that everything is as it should be. I just assume that the direct deposit from my husband’s work will come through, and that all of my transfers to and from various places will arrive on time.

Unfortunately, that’s not how it played out for me a copule of weeks ago. A clerical error meant that my husband’s pay didn’t come as expected (it’s in the bank now, coming two weeks later than expected), and the fact that it takes three to four business days for money to move between PayPal and my bank account didn’t help matters. And in between, all of my automatic withdrawals, from the mortgage payment to the IRA contribution, all came out as scheduled. I found myself paying overdraft fees, and in the embarrassing position of going into the bank to find out if some of the fees could be waived (some of them were).

Why I Decided to Add Overdraft Protection to My Account

Up until two weeks ago, I didn’t have overdraft protection. I agreed to the “standard overdraft services” provision that  allows the bank to accept transactions, and I thought that was good enough. Because overdrawing my account is not something that happens. However, with my mostly automated finances, and the unpredictability of mine and my husband’s pay (I’m self-employed and he’s an adjunct), I ran into an unexpected cash flow issue.

So I bit the bullet and signed up for the true overdraft protection for my account. Here is what overdraft protection usually consists of these days:

  • Overdraft protection is a line of credit. It is treated as a revolving line of credit, so it is actually a loan. That means you pay interest on your balance. Your interest rate varies according to a number of factors, including your credit score.
  • There is often an annual fee. I’m not thrilled about my annual fee, but it’s less than my overdraft fees ended up being. If something similar happens again (and I will be taking steps to ensure it doesn’t), at least I’ll come out ahead. If it doesn’t, I guess the annual fee is worth my peace of mind.
  • An automatic transfer takes place, sending money to your checking account, if you overdraw your account. At some banks, you will pay a small fee if this happens. If you have the wherewithal to transfer the money on your own, before it kicks in, you don’t usually pay a per-transaction fee, though you still pay interest.

So I have the overdraft protection. This situation really scared me, and I don’t want to be unprepared in the future. While I hope never to need the overdraft protection, right now it’s really helping me feel better. And, of course, I will be keeping a better watch on the account to make sure that we really have the money that we should have.

What do you think? Is overdraft protection worth it?


Published or updated August 31, 2012.
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{ 3 comments… read them below or add one }

1 John smith

You may consider a new bank. Often times overdraft protection can simply use a savings account and is not a line of credit at all, is not a loan, and should not have a balance on which you pay interest. Banks will often allow the use of different financial instruments as overdraft protection such as the above memtioned savings account, a credit card, or an existing HELOC. In addition, many banks offer this benefit without an annual fee at all. I would recommend the savings account as the best option. It has no annual fee and if never needed has no cost to you. When it is needed there is a fee to transfer the money from your savings to your checking but that fee is far less than the average $35 per overdraft option.

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2 Tammy

As a freelance worker myself, I realized overdraft protection was a necessity rather than an option. A couple of years ago overdraft fees totaled over one hundred dollars after a payment from a client was held up. I decided I never wanted to feel that anxious about my finances again. Overdraft protection is definitely worth the peace of mind to me.

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3 S. B.

I also wonder if you should consider a different program at your bank, or perhaps a different bank altogether. I’ve had my HELOC linked to my checking account for about 15 years. I’ve never paid an annual fee or transaction fee to cover the overdrafts, and the amounts are covered automatically on any overdraft. The only costs I incur are the interest on the HELOC until I pay it back, and the interest is very low (i.e. prime – 1%). I pay the HELOC back in days so the interest costs are very small.

I’ve overdrafted dozens and dozens of times in the last 10 years, but this arrangement costs me about $5 a year in interest on average. It provides a lot of peace of mind and prevents me from racking up lots of big fees from a bunch of tiny overdrafts.

I use one of the largest banks in the country, so I don’t think it’s that difficult to find an arrangement that works like that.

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