Whether you engage in online banking or traditional banking, overdraft fees are a very common problem. The term overdraft protection has a feel good vibe to it. You are being protected. We all love to be protected. Unfortunately, this supposed “protection” sucks.
What’s this overdraft protection all about? Essentially, when you’re bank account goes below zero, your bank will grant you access to X amount of additional dollars. Instead of informing you that you have no money, your bank allows you to spend more money. My bank offers $500 in overdraft. This may seem like a nice gesture, but you’re definitely not getting this money for free. You can get hit pretty bad with overdraft fees at the end of the month.
I don’t like to write one-sided articles, so let’s look at some of the pros and cons of overdraft protection…
Pros of overdraft protection:
- Your checks will be covered up to a certain point when you have no money in your bank account. This can save you from an embarrassing situation where you have a check bounce.
- Emergency cases. If you don’t have an emergency fund and don’t want to use your credit card, overdraft protection can really come in handy.
Cons:
- The costs of overdraft protection. Different banks charge differently and have different fees for an overdraft payment. Either way, the costs can be pretty hefty.
- Abusing this privilege. If you have no money in your bank account, you shouldn’t be spending money! I know that this is an asshole thing to say, but it’s the truth. Unless an absolute emergency occurs, you shouldn’t be digging your bank account into a negative.
So now that we’ve looked over the good and the bad involved with overdraft protection, let’s look at how you can prevent having to make that overdraft payment at the end of the month:
Check out your balance often.
I engage in internet banking and mobile banking because I like to check my account balance fairly regularly. I feel much more comfortable when I stay on top of things and know what’s going on at all times. How about you guys? Do you check your account balance often?
Have a backup plan.
There may even be times where you’re better off using your credit card (depending on how far away your payment is). At least with your credit card you have a set date to make your payment by. With overdraft protection, you get charged as soon as you take advantage of this service (in most cases). It also helps to have an emergency fund setup to deal with any unexpected expenses that may come your way.
Keep a buffer.
It always helps to keep a couple of extra bucks in your bank account (if possible, of course). The closer your bank account gets to zero the more you have to worry about dipping into your overdraft protection. I always try to keep an extra $100 in my checking account, especially when payday is far away.
Some banks do offer free overdraft protection, but it’s extremely rare. Have you had any experiences with overdraft protection?
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I’m based out of Canada and I wasn’t aware of that new regulation. That’s a positive step forward with the regulations. Just curious, how were you charged? Was it a standard fee or was it interest based?
Over-drafting seems like such a trivial thing. How do you not know how much is in your account? BUT it inevitably happens to everyone at some point.
I had a slush find account that I cleared out about a year ago. I made a big purchase and brought the balance down to like $20.00, but some company made an unapproved withdrawal and sent me into overdraft… granted it was not my fault, it was a mess to try and get straight with the bank.
My husband and I have never had an overdraft. Now I’m probably jinxing myself.
I’m a BIG believer in having some cushion. In college it was a couple of hundred dollars that I refused to touch that sat in my checking account, now it’s $1000 buffer in our brick and mortar checking account and our ING checking account. Then we have the emergency fund. Then we have the 0% credit card (until next April). Then we have an ING line of credit, we can cash out stocks, steal from ourselves via the Roth IRA, or even get a home equity line of credit (HELOC). I love having options and cushion.
If I was giving my teen sister advice, I’d say start with checking account cushion so you never have to waste money on fees. Then build up an emergency fund so stupid stuff like a flat tire doesn’t knock your finances out.
Sounds like you got the whole backup plan figured out. You still haven’t touched the money from college? How do you do? I’m really tempted right about now to touch some money that I have set aside. Help!
The few hundred grew into a couple of thousand that I completely ignore. It’s my padding…I dip into it for cash for spontaneous trips and stuff, but immediately have money transferred from ING Savings to replenish it. I wouldn’t feel safe and secure without it so I’m not tempted to spend it.
I’d suggest having very little padding if having money around is tempting. I am a natural money hoarder, if I wasn’t, I’d have everything transferred somewhere a little more difficult to touch like Smarty Pig. $100-$200 padding is sufficient in most cases.
Oh, another “trick” of not spending is to set goals that you like more than whatever you want to buy. Like I want an MP3 player with an FM radio right now, but I want to take a 5 day cruise in March even more, and I want to retire early even more than that. That gives me patience to save for both goals and find the best deals – to stretch our fun money while still hitting our savings goals for early retirement.
Good luck!
That’s an interesting trick that I’ve sort of used before. I love to get away a few times a year. I also like to dress well. However, I place more value on going on trips with friends/family than I do on buying expensive clothing all of the time (and as they, “uniforms don’t win games”). As a result, I put more money into my vacation account than I spend on new clothes.