Do you need Overdraft Protections?

Have you heard about “Overdraft”, and “Overdraft Protections”?  Today, I’m going to talk about it.  Why?  I want you to have the knowledge, so you can make a decision that is best, only for you and your family.

Overview:

If you choose to overdraft, it’s like you start digging a hole for yourself.

Then if decide to go for overdraft protections, you are digging yourself deeper and deeper into the big hole.

You might ask: Helen, why should we trust you?  How do we know what you said is correct?

Three reasons:

  • I was a retail banker for 19 months, and helped bank customers on overdraft issues daily.
  • As a bank customer in US for 21 years, I never ever overdrafted my accounts. I love playing those numbers (I used to be an engineer before retiring early).
  • Helping people saving money, I feel that’s a good thing to do.

What is Overdraft?

Overdraft or overdraw are two words.  But they mean the same:  you are spending the money you don’t have on the bank account.

Here is an example.  Assume that, the balance on your checking account is $10 right now.  You are at a department store.  A pair of shoes costs $40.  You swipe the debit card at the check out, what happens next?

Two scenarios:

  • Scenario #1: if your checking account has the overdraft option turned ON, it means you choose to overdraft:

In this case, your debit card transaction will probably go through, though your account only has $10.  You are happy to get your shoes, right?

Don’t smile too early.  How much will you end up paying?  It could be as high as $70 in total.  Why?  You have to pay the overdraft fee, which is usually around $30 per transaction.  $40 for shoes + $30 for overdraft  =  $70.

Ouch, you have paid 75% higher than anybody else.  How?  $30 fee / $40 base price = 75%.

After your $10 is spent, you still owe the bank $60.  You’d better put at least $60 into the account quickly, and bring back the balance to zero or above.  Otherwise, you’ll have to pay the bank more fees.

Are you still smiling, or crying?

  • Scenario #2: if your checking account has overdraft option turned OFF, it means you choose NOT to overdraft:

Your debit card transaction will be declined, saying insufficient funds.  The shoes stay at the store, and you go home empty-handed.  It may be upsetting for a while, as the shoes do look lovely.  But life moves on.  The next day, you forget the whole thing.  The good thing is that, you didn’t pay any fee.

As a bank consumer, you are on the driver seat.  It’s up to you, if you want to turn the overdraft option on or off.

My recommendation is:  turn the overdraft option OFF, please.  You don’t want to get yourself into the big hole.  If you don’t have the money, don’t buy the stuff.  Don’t let overdraft happen, please.  You deserve much better than paying those fees.  At the end of the day, your finances matter to you a lot.

Debit card is handy to use.  But, you got to be careful.  It could give you a lot of trouble if the overdraft option is on, while you don’t keep track of your account balance.  A cup of coffee may only cost $3.  With overdraft option on, you could end up paying $33 for a cup of coffee if you overdraft.

Overdraft option affects not only debit card transactions, but also checks, ATM withdrawals, online bill payment, etc.

In many cases, overdraft happens to checking accounts, as you pull money out of it so often.  It could happen to your savings account, or money market account, too.  Watch it.

Each bank could use different term for the overdraft option.  They may call it:

  • Debit card coverage
  • Overdraft coverage
  • Overdraft service
  • Overdraft privilege
  • Overdraft election
  • Overdraft opt out or opt in

Or the word “overdraft” could be replaced with “overdraw”.  No matter what, they are the same stuff.

The best way is:  turn the overdraft option OFF.

What is Overdraft Protections?

Once you turned off the overdraft option, this part is easy.  You don’t need any overdraft protections.  Why?  Because overdraft is not an issue anymore, you already turned it off.

The best overdraft protection is No Overdraft.  That’s how I feel.

Just for reference, let’s talk about it a little bit.

Usually each protection comes with fees, and makes your life more complicated.  Overdraft protection is only for those accounts that have overdraft option turned on.  Here are some options for the protections:

  • Use savings account or money market account:

The checking account could be linked to the savings or money market account.  When you overdraft, some money will be transferred from the savings/money market account to the checking account.  The overdraft fee may be avoided, but you still have to pay the transfer fee.

  • Use credit card:

The checking account could be linked to a credit card.  When overdraft happens, a cash advance will be taken from the credit card.  I’m totally against this idea.  Why?  The cash advance interest rate of credit card is very high, at least 20%.  That’s the rate you’ll have to pay.  Don’t do it.

  • Use Home Equity Line of Credit (HELOC)

You could do it does not mean you should do it.  Link checking account to HELOC, and use HELOC to cover overdraft?  You are kidding me.  Don’t do it.  Read my HELOC post, and empower yourself.

In summary, it’s NOT okay to overdraft.  If you love your money, turn off the overdraft option.  It’s good for you.  Do you need overdraft protections?  No, you don’t need it, as you should not overdraft, my friend.

Keep track of your account balance.  You don’t want checks or online payments bounced back, and pay the fees and hassles.  Online banking can’t do the job for you, as it could take even days to post those transactions.  You need to know exactly how much you have on the account, unless you are a billionaire, or you enjoy giving your money to the banks.

Questions for our discussions:  did you ever overdraft your account?  How much overdraft fees did you pay in 2017?

Take a look at my eBook, a mini-memoir on Amazon: “DAD’S BICYCLE: Journey of A Chinese Family”.

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4 Responses

  1. Caroline says:

    Zero! But I did overdraft my account in my early days, not proud of it.

    • Retire Early Helen says:

      Zero overdraft is great. Yes, we all learnt it over time. Overdraft is good for the banks, but not good for the bank customers.

  2. GYM says:

    I have never over drafted, but I sometimes take out too much money to keep the minimum balance without getting charged a monthly fee! It really annoys me when I do that and then I have to call and try and get them to reverse it. Great post Helen!!

    • Retire Early Helen says:

      I guess the situation is similar in Canada and US. Here at the local banks, the free checking account is pretty much gone. The minimum balance requirement is hard for many families to meet. It ends up with different fees customers have to pay. It is tough.

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