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Using credit card for overdraft protection

It's a little known industry perk: If you have a checking account and credit card with the same institution, you may be able to link the two and use your credit card as overdraft protection.

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Whether you want to could be another issue.

Overdraft fees have always been a source of ire for consumers. A simple math error, a check cashed "too soon" or a forgotten, prearranged electronic payment can result in a fee that usually runs from $20 to $35 for each transaction. And if you have a lot of traffic in your account -- multiple checks or cash card purchases before you set things right -- those fees can multiply.

Traditionally, institutions offer several ways to limit fees and make sure obligations are paid any time the balance dips below zero. Many times banks or credit unions will allow customers to apply for a line of credit, which is then tapped if the account balance hits the red zone or they often can link a checking account to a savings or money market account. In that case, money from savings will be funneled into checking if the checking account balance goes below zero.

Some consumers have another option: plastic.

"It's a good idea, assuming the fees are reasonable and the credit card rates are reasonable," says Jean Ann Fox, director of consumer protection for the Consumer Federation of America.

Curtis Arnold, founder of CardRatings.com, agrees, even as he admits the idea of using credit to backstop a checking account makes him nervous.

"Mistakes happen," he says. "Even the most financially disciplined folks out there will make a mistake.

"If the rates are reasonable, it's giving you the grace period of a 20- to 25-day, interest-free loan," Arnold says. "That could be a good thing. You've got time to get everything straightened out before you pay."

Not a new idea
Wachovia has offered the option of using its cards for overdraft protection since 1992, says Mary Beth Navarro, the institution's retail bank customer service manager.

When the card is tapped to cover an overdraft, there is a $10 fee. While the overdraft is treated as a cash advance, the APR is the same as the credit card and any cash-advance fees are waived, she says.

"It just gives customers another option," says Navarro. "Not every customer has a savings or money market account. And it's less expensive than if you were to have an overdraft."

Next: "In addition ... payment is guaranteed. ..."
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