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Should You Get Overdraft Protection?

There’s nothing more awkward than having your debit card declined when you’re out to dinner or shopping. But if you’ve got overdraft protection, you can swipe your card without fear. When your account has this feature, the bank can automatically transfer money from your savings account in exchange for a small fee. You have to sign up for protection, so if you’re planning on opening a new checking account, here’s what you need to consider before opting in.

Benefits of Choosing Overdraft Protection

Aside from sparing you the embarrassment of having your debit card turned down, overdraft protection can come in handy if you’re in an emergency situation. If your car breaks down and you need a tow but you don’t have the cash, you can fall back on your debit card. Having that peace of mind can outweigh any fee you may have to pay for using overdraft protection.

Speaking of fees, banks tend to charge much less for overdraft protection than they do for a regular overdraft or insufficient funds fee. The average overdraft fee comes to around $30 but the transfer fee for overdraft protection may be $10 or $12. You’re still paying a premium for overspending, but it’s not taking as big of a bite out of your bottom line.

Why You Should Think Twice About Opting in

Should You Get Overdraft Protection?

If you’ve got a credit card or another bank account you can access in a pinch, skipping out on overdraft protection may be the right move. According to a report from the Consumer Financial Protection Bureau, opting in may actually cost you more money in the long run. The report found that consumers who opted in paid nearly $30 a month in bank fees, compared to about $7 a month for those who didn’t. That adds up to a difference of over $250 per year.

One misconception about overdraft protection is that it applies to any transaction you make, but it’s usually only good for debit card purchases. If you bounce a check or an online bill payment gets returned, your bank might still be able to charge you the full overdraft fee to cover it. Some banks can tack on as many as six overdraft charges per day so opting in might not be a foolproof solution to avoiding the fees.

How to Avoid Paying Overdraft Fees

If you don’t like the idea of handing over your hard-earned money to the bank, there are a few things you can do to sidestep overdraft fees once and for all. For instance, you can set up account alerts through online or mobile banking so you get a notification any time your balance drops below a certain amount.

Linking your checking and savings accounts makes it easier to transfer funds back and forth when you have a negative balance. Just keep in mind that all savings accounts, even the best accounts, are subject to federal rules that limit you to six withdrawals per month. After that, your bank can charge you a fee or convert your savings to a regular checking account.

Using a financial app to monitor your balances is another easy solution if you’ve got accounts at multiple banks. Apps like Checkbook or Mint let you keep tabs on what’s going in and out so you can head off potential overdrafts before they happen.

The Bottom Line

Should You Get Overdraft Protection?

Whether or not you need overdraft protection comes down to how careful you are with your spending and what options you have if you run out of cash. If you’ve got another way to pay, overdraft protection may be more expensive than it’s worth. On the other hand, if you don’t have a safety net to fall back on, opting in could help you out of a jam.

Photo credit: ©iStock.com/Amarita, ©iStock.com/pinstock, ©iStock.com/JeanUrsula

Rebecca Lake Rebecca Lake has been writing about the nuts and bolts of personal finance for nearly a decade. She is an expert in investing, retirement and home buying topics. Her work has been featured on The Huffington Post, Business Insider, CBS News, U.S. News & World Report and Investopedia. As a homeschooling mom of two, she's always looking for ways to make the most of every dollar.
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