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Should You Opt for Overdraft Protection?September 23, 2020
What happens when you write a check or swipe your debit card for an amount that is over and above what you have in your checking account?
Well, in most cases, you become liable to pay overdraft or insufficient funds fees.
These days, many banks inquire whether you would like to opt-in or opt-out of overdraft fees.
Let’s say you’ve opted in. In that case, whenever you use your debit card to pay an amount greater than what you have in your account, the bank would approve the transaction and charge you an overdraft fee.
However, if you’ve opted out, then in such circumstances your transaction would be declined, and you may be charged a insufficient funds fee.
Having your check bounce or debit card declined due to insufficient funds is not only embarrassing – it can prove to be expensive as well.
Other than the insufficient funds fee that you’ll need to pay to the bank, the merchant to whom you were presenting the payment may also charge an additional fee over and above the original transaction amount.
On the other hand, over-drafting your account can attract overdraft fees which can be as high as $34.
If you are someone who frequently ends up over-drafting your account, then this option could prove to be expensive as well.
How overdraft protection can help you
Overdraft protection means linking your account to another account, such as a savings account.
So, if there are insufficient funds in your checking account, this additional account is accessed to make good the payment and avoid overdraft fees.
There are three main ways in which you can enable overdraft protection.
1. Overdraft line of credit
Some banks offer an overdraft line of credit to consumers. Every time you overdraw your checking account, this line of credit is used to meet the excess payment and avoid overdraft fees.
However, before extending this facility, the bank checks your credit; this results in a hard inquiry and can temporarily ding your score.
Another thing to remember is that if you’ve used your line of credit and don’t pay off the balance before the grace period runs out, you may be charged additional fees
2. Connect your credit card
If you have a credit card with the same bank that you have a checking account with, you can connect your card to the account for overdraft protection.
However, be aware that many issuers treat overdraft payments via credit card as cash advances.
Cash advances typically have no grace period – they attract higher interest rates and a cash advance fee as well, often making this form of overdraft protection as expensive as overdraft fees.
Hence, before using this option, make sure you conduct enough research to determine if it is actually worth it
3. Opt for automatic savings transfer
You can also connect your savings account with your checking account.
In case you authorize a transaction where the amount exceeds the funds in your checking account, the bank would simply transfer the excess funds from your savings account.
Most banks don’t charge a fee for this facility.
Whatever form of overdraft protection you use, you should always remember one thing – this facility is meant for temporary relief and you should not make it a habit to overdraw your account.
In case you cannot pay back the amount charged to your credit card or line of credit, you’ll be in trouble; as you miss payments and your credit utilization ratio increases, your score could take a major hit.
Thus, the best thing to do is to always be careful about your spending – never withdraw more than you can afford, and use the overdraft facility only in case of an emergency.
Many individuals rely on the overdraft facility provided by their banks to cover a temporary shortage of funds.
However, as discussed above, this route can prove to be expensive.
A better approach in such cases would be to approach our team at Fund&Grow.
We offer people with good credit the opportunity to obtain $50,000 - $250,000 of unsecured credit at 0% interest for a period of 6, 12, or 18 months.
The amount can be used for anything from funding a business to providing a down payment on a property.
So, if you have this kind of requirement, call us at (800) 996-0270, and we’ll do our best to assist you.