Overdraft Protection

September 27, 2009 11:10:30 AM PDT
Recently, there has been some heated dialogue pertaining to the benefits and costs associated with overdraft protection. Originally, financial institutions extended this protection as a "courtesy pay" on overdrawn paper drafts (i.e. checks) to customers in good standing. However, with the increased use of ATM's and debit cards this former loan-based service has evolved into a lucrative fee-based service, upsetting many consumer advocates along the way. Regardless of which side of the debate you back, responsibility for the proper management and usage of these cards ultimately belongs to the card holder. And to help all of us more clearly understand these responsibilities and their implications, Joan Jensen, president and CEO of The Central Credit Union of Illinois offers the following recommendations for getting the most benefit from while avoiding the pitfalls of overdraft protection.

In today's world, there are many ways you can overdraw your account.

  • Paper checks
  • ATM withdrawals
  • Debit card purchases
  • Electronic debts
  • Automated bill payment

When does an overdraft fee make sense?

  • To avoid other fees or penalties on returned checks charged by stores, utilities, landlords, and mortgage companies.
  • To maintain uninterrupted service on key services such as insurance and phone.

When are overdraft fees a bad idea?

  • The $40 hamburger when a $5 debit card transaction is automatically approved even if there is not enough money in your account. The result is a charge for the hamburger and a fee for overdrawing your account.
  • Managing "Invisible" Money: Unlike yesteryear when check registers and cold cash provided us with a hands-on approach to money management, today's immediate spending with ATM and debit cards present challenges that require the different skill of managing "invisible" money.

    • Keep records: Online or on paper, keep track of every transaction and monitor your account with home banking.
    • Alerts: If possible, set up your account to text or e-mail you when your balance gets too low for comfort.
    • Cushions: Keep a cash cushion in your account to allow for errors or emergencies.
    • Link to a back-up account. Set up a savings or money market account at the same financial institution and link it to your checking account to cover possible overdrafts.
    • Get an overdraft protection loan with no per item fees. Account should have a "credit card like" interest rate. Pay off the loan as soon as possible to minimize your finances charges. This option will cost you a lot less than paying a fee for each NSF item.

    Last Resort Option: If you know that money management is a personal strength, then maybe it's time to eliminate altogether the risk of accumulating needless fees.

    • Close the Gate: Stop in your branch and request that bounce protection be removed from your account. Many financial institutions will do this if you ask, but first make sure you understand ALL the implications. In addition to cutting the debit card off when you're at the store and low on funds, will it also refuse to allow bounced checks and other transactions?

    What changes are taking place at your bank? The playing field is always changing. Earlier this week, two of the nation's biggest banks, announced plans on to overhaul their debit card programs by lowering or eliminating fees, changing the way transactions are credited and allowing customers to opt out of overdraft protection. Stay current to changes scheduled to take place at your bank.


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