Does Overdrafting Affect Your Credit Score & Do You Need Protection?

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do you need overdraft protection?
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,…

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 couple 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.

Should You Get Overdraft Protection?

Let’s say you’re going out to eat for lunch. You have a nice lunch with your coworkers.

The bill is a reasonable $12. You swipe your card for your tasty lunch and you move on with your life.

You didn’t know you’re overdrawn, and you’re going to be facing those fees. Your affordable work lunch for $12 just became a $45 lunch.

If you keep swiping your card before you get a notification or you check your account, you could rack up three or four overdraft fees before you catch the problem.

If you make a simple mistake when it comes to your checking account, you’re going to be facing an overdraft fee. Every bank handles overdraft fees differently, but the average fee is a little more than $33.

That’s a huge slap on the wrist for a simple mistake, right?

Everyone makes mistakes. You probably think there is no way you could ever make a mistake like overdrawing on your bank account, but it happens to millions of Americans every year.

It’s easy to lose track of how much you have in your account or accidentally forget to transfer money from one account to another.

If you’re trying to decide if you should spring for the overdraft protection, you need to decide if the fees are worth it.

If you’re someone who stays on top of your accounts and checks them every day, then it’s probably not worth the money to get overdraft protection.

On the other hand, you’re more laid back with your finances then those overdraft protection fees might be worth the cost.

There are some alternatives to having to pay for the overdraft protection. A lot of banks will let you sync your credit card account to your checking account.

With these banks, if you overdraft on your checking account, they will be able to use your credit card or savings account to pay for those additional charges.

With most banks, they will offer this feature at no additional cost.

Another way you can skip the overdraft protection fees and still avoid the fees is to set up alerts on your account. Every bank has an app or alert system you can use.

You can set up alerts on your account in case they drop below a certain amount. You can set them up to email you or text you.

This is one of the easiest and simplest ways you can ensure you don’t overdraft your account and have to pay those massive fees every time you swipe your card.

Bank Overdraft Rules

About 10 years ago, banks automatically enrolled members in overdraft protection. Now, though, consumers will have to agree to opt-in to such overdraft programs, at least as far as debit cards are concerned.

This means that if you do not explicitly accept the idea that banks can let transactions go through (and charge you a fee), you will be cut off if you don’t have enough money in your account to cover a purchase.

Your transaction will be denied, and you will either have to pay with another card or cash or reduce the amount of your order.

If banks let debit card transactions go through, and you have not opted in, then they cannot charge you overdraft fees.

When you open a new account, you will have to indicate whether you want to use overdraft protection.

For those with existing accounts, be on the lookout for information about the new overdraft rules.

Financial institutions are being required to notify you of the changes, and ask if you want to opt in.

As you might imagine, financial institutions are doing their best to convince you that you “need” this “protection”, playing up the convenience of being able to continue buying things even though you don’t actually have the money in your account.

These rules also apply to ATM transactions. If you do not opt in for standard overdraft protection, you will not be able to use the ATM to overdraw your account.

It is worth noting that if you do opt in, and agree to these standard overdraft practices, you can cancel at any time. You can also choose to opt in later if you decide that the convenience is worth the high price.

This is a good time to re-evaluate your money management and spending practices and consider keeping better track of your accounts so that you do not spend more than you have in your account.

Banks Can Still Collect Some Overdraft Fees

While these rules will affect your debit card purchases, there are still ways for financial institutions to collect fees on overdrafts.

You may not opt in for overdraft protection, but it important to note that the new rules do not apply to checks that you write, or to ACH billing.

This means that your checks and automatic billing arrangements can still come with overdraft charges, rather than being denied, even if you choose not to accept standard overdraft protection.

If you want to cancel overdraft practices on automatic billing and checks, you will have to speak with your bank specifically about their practices.

However, banks are under no obligation to deny automatic billing transactions or checks that will overdraw your account.

Is Overdraft Protection Right for You?

Many would argue that you should never need overdraft protection, as long as you live within your means and keep tabs on your spending.

For those who habitually engage in overdrawing their accounts, it might actually be best not to opt in. This could be a chance to let tough love force a change in spending habits.

For those who rarely overdraw their accounts, though, opting in might not be such a bad thing. It can protect you against mistakes, or the occasional month when your cash flow is a little off.

However, it is important to avoid letting overdrawing your account a regular occurrence.

Evaluate your situation individually, and decide whether or not overdraft protection of this nature would help keep your finances moving smoothly.

What do you think? Is overdraft protection worth it?

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About Miranda Marquit

Miranda Marquit is a freelance writer and professional blogger. She has contributed to, and been mentioned by, numerous financial web sites, including USA Today, The Huffington Post, The San Francisco Chronicle, The New York Times, Consumerist, The Atlantic Wire, The Wall Street Journal, The Washington Post, and other publications.

Her blog is Miranda Marquit.

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  1. John smith says

    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.

  2. Tammy says

    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.

  3. S. B. says

    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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