Is Overdraft Protection a Good Idea?

Where I live, we don't have so many issues with credit cards. But what we do have is overdraft protection. So many people swear by it, as a back up, but for so many people, it causes tremendous financial issues, as people dig themselves into deeper and deeper holes. This post explores overdraft protection, how it works, and whether or not it is a good idea.

There are different ways in which consumers can protect themselves. You can think of the car and travel insurance, as well as protection against theft. But believe me, there are also various ways in which consumers can mess themselves up, including through the aforementioned protection. In banking, there is a provision for consumers to get overdraft protection which primarily protects them from overdrawing an account. However, is it a wise move for rational consumers? Well, it seems to be a good idea on face value. Many consider it in case they make purchases via debit cards and lack enough money in the accounts. In this case, the bank is at liberty to transfer money from any of the related accounts, including savings to account, to finance the purchase.

You may avoid that embarrassment that might come at the check-out point. Nevertheless, you can end up paying huge fines and fees. The wise say it is better to prevent than it is to cure. For many individuals and businesses, overdraft protection might turn out to be more effective compared to fees charged by banks. Although the fees may not be horrible, they can accumulate in case you keep overdrawing your account.

Many banks charge $10 whenever funds are transferred from customers’ checking accounts. On the other hand, overdraft protection often comes at a cost of $12 in case the required amount is $50. However, the charge dramatically moves to $20 in case the amount is more than $50.

Ideally, the service is meant to be customer friendly. It was designed to safeguard customers an embarrassment that could come due to a failed card transaction or a bounced check. In case you want to safeguard yourself from overdrafts without incurring additional costs, overdraft protection may make sense. If you do not use overdraft protection, a transaction that requires an amount higher than what is in the account will be declined. Rather than an overdraft fee, you will be required to pay a fee for non-sufficient funds. Let us briefly discuss the advantages and disadvantages of overdraft protection.

Advantages of Overdraft Protection

The most outstanding benefit of overdraft protection is that even if your checking account does not have enough money, the check will still be cleared. Additionally, you will always be able to get cash from the ATM, and your debit card will always work. This means you will be saved from the issue of bouncing checks and that embarrassment that often comes with that. Well, let us summarize some of these benefits.

Deters the disappointment that might occur at the checkout line

As already stated, the check will still be cleared even if the funds in the checking account are not enough for the transaction in question. This means the product you had gone for will not be taken back or the transaction cannot be rejected. The transaction will be fully covered, including the costs of the overdraft.

You will still have cash for emergencies 

In case you are plagued with an emergency, you will still have cash for the situation. For instance, if you run out of gas, you can still be covered through the card. Even some medical expenses can still be covered.

Availability of funds between pay checks

In case your financial situation is hard between pay checks, you can still access funds that can take you through to the next payday. This temporary availability of money is essential in times of financial gap because of unforeseen expenses.

Disadvantages of Overdraft Protection

An excellent idea in theory, yes, but there are several disadvantages that you need to know. Here are some.

Fees and interest

We stated at the outset that the bank would charge some fees. You will be required to pay interest on the borrowed amount. This happens until the amount is fully paid. It would be best if you were careful. Otherwise, several transactions can cost you hundreds of dollars in a year.

It encourages poor spending habits

While overdraft protection appears convenient, it promotes poor spending habits such as overspending. Why should you spend what you do not have? Besides, overdraft protection makes it easier for individuals to forget to be on top of their accounts.

It can be hard to break free from it. In other words, overdraft protection is addictive. Individuals who have used it several times often feel they cannot do without it. If you used it excessively, you might end up remaining with very little in your checking account. This is the deposit consumed by the funds overdrawn along with the fees charged. You may not even remain with the amount that can cover your expenses up to the subsequent pay check. If this happens, you may develop an over-reliance on the service due to the financial gap that you will be remaining with.

The transaction may not go through

It is not guaranteed that the transactions will always be cleared, if you lack enough overdraft protection to cover the shortage fully. A declined transaction may not be something of a big deal. But what if you have an emergency? It would help to have a backup plan. In case you cannot entirely rely on the overdraft protection, you may have to carry some extra cash or always have access to your credit card. Remember you can incur more or fewer costs using credit cards compared to overdraft protection. It just depends on the agreement, along with the terms and conditions. When faced with emergencies and these two options cannot work for you, try to borrow money online instantly, perhaps you will save the situation. Simply go to this page to get the suitable loan for you.

The Bottom Line

There are several advantages that individuals can get by taking overdraft protection. An ounce of prevention is worth a pound of cure.  One significant benefit is that you will avoid the embarrassment that you would have otherwise suffered due to a bounced check or a rejected debit card transaction. However, there are also some significant problems associated with the service. For instance, it encourages poor financial habits such as overspending. It is also addictive, and the fees charged in several transactions can add up to hundreds of dollars. Coming up soon- alternatives to overdraft protection.

Penniless Parenting

Mommy, wife, writer, baker, chef, crafter, sewer, teacher, babysitter, cleaning lady, penny pincher, frugal gal

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