What Is Overdraft Protection?
Overdraft protection is supposed to help you in the event you overspend from your checking account. The idea is that the bank or credit union where you keep your money will cover the charges even if you don’t have enough funds in your account to cover the check you wrote, or that transaction you used your debit card for. Without overdraft protection, the institution will charge you an overdraft fee. That’s right…you don’t have enough money, and they charge you for it!
Overdraft protection isn’t just free money, though. The way the bank covers those overdrafts is by transferring the money from another one of your accounts. You tell the bank which account to use (maybe a savings account), and they’ll automatically transfer the money over for you.
Overdraft protection isn’t a bad thing, but don’t use it as an excuse to spend more money than you have. Your first line of defense should be knowing how much money you have in your account and not spending more than that. Keeping a buffer of $100 or so that you choose not to touch can help make sure you don’t overdraft in the event you make a math mistake or forget about a pending charge. Banks are tricky, too, they don’t always show all your pending charges or may conveniently drop a pending charge for a day before it posts to your account. If you aren’t paying attention, you may think you have more money available than you do. That’s why it’s also a good idea to keep a record of all your transactions. You can do that with the register that came with your checking account, Microsoft Excel (or another spreadsheet) if you want the math done for you, or with any number of free apps like EveryDollar.
Now, here’s where you need to be careful. Plenty of banks offer forms of overdraft protection that come in the form of a “reserve line of credit”. These are not the same as shifting some of your money from one account to another, so be sure you understand what you’re signing up for when you do. A reserve line of a credit is actually a small, revolving debt (like a credit card). The bank covers the amount of your purchase but then records it as debt which you then have to pay back with interest! Some people rely on these lines of credit month by month because they spend more than they have. Every month they spend too much, the bank loans them the difference, and then when they put new money in their account (like a direct deposit from work), the bank takes the money immediately plus interest charges. If you don’t pay attention to your account, this could be happening without you even realizing it. The cost is paying more than it’s worth for everything you overspend on. That’s a horrible money habit!
If you’d like help developing good money habits like regular saving and avoiding the interest that comes with debt, schedule an appointment with a financial coach today to get started.
