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Using
credit card for overdraft protection | | |
| Is
there a cash-advance fee? Instead of adding charges to your credit card
balance, institutions often pull funds from your card to deposit into your bank
account, similar to a cash advance. Ask if you'll be charged a cash-advance fee.
Some institutions will waive the cash-advance fees when the institution is transferring
money to supplement your checking account balance. If
the bank triggers a cash advance, will you have to pay a higher APR? Typically,
the interest rate on a cash advance is 3 percent to 4 percent above your normal
credit card APR, says Arnold. And sometimes the clock on that interest starts
ticking the minute the advance is made (unlike actual charges, where you have
20 or more days to pay off the balance before incurring interest), he says. So
find out how the bank will apply those rules if it has to tap your credit card.
Can you pay off cash
advances separately? While some cards will let you pay the cash-advance
portion of your balance whenever you choose, others only allow you to pay off
the cash advance after you've paid the regular balance in full. As a result, you
could be forced to carry higher-interest debt longer. If that's the case, credit
card-backed bounce protection can become a very unattractive option, says Arnold.
What is your
credit limit? If you're sneaking up on your limit, a bounced
check or two, plus fees, could send you over. Then you're incurring
expensive overlimit fees and possibly damaging your credit rating
at the same time.
Is this the cheapest
option your bank offers to cover overdrafts? "Consumers
should definitely not assume a credit card is the cheapest option,"
says Eric Halperin, director of the Washington, D.C., office of
the Center for Responsible Lending. "A line of credit is probably
cheaper," he says, especially if the bank uses the credit card
to collect a cash advance. At the same time, using a credit card
is probably going to be less expensive than incurring regular overdraft
fees, he says.
What
protection do you have in case of fraud? Sometimes overdraft arrangements
can raise the stakes in cases of identity theft. If a criminal manages to access
a checking account that's linked to a line of credit or savings account, he could
potentially drain your savings or exhaust your line of credit, as well. So before
you arrange overdraft protection with your plastic, ask the bank how it would
treat the same situation if the checking account were linked to a credit card.
Could the thief run up a balance or would you be protected? At Wells Fargo, the
bank promises customers zero-liability in cases of theft or fraud, according to
a representative. Stay alert
The rules that govern your checking account or credit card today could change
next week, says Arnold. So if you've linked the two services together, keep an
eye out for rule changes, fee changes or corporate mergers that could affect that
overdraft protection.
Wachovia customers learned recently that a merger
between two other financial giants would effectively eliminate their
existing card-based overdraft protection. Wachovia had partnered
with MBNA to provide credit cards for Wachovia customers. But when
rival Bank of America acquired MBNA, Wachovia didn't want those
credit cards linked to Wachovia accounts, which meant the cards
could no longer be used to guard against overdrafts. So it
notified customers, and also offered them the option of obtaining
a new, in-house credit card that would include overdraft protection.
In the
end, the decision comes down to your comfort level with the idea of linking checking
and credit, your need for overdraft protection and good, old-fashioned math. |
