Bank overdraft protection: Do you need it?

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There is perhaps no thornier issue in consumer banking than overdraft protection.

Banks see it as a valuable service, which lets customers keep using their debit cards for purchases and ATM withdrawals in exchange for a reasonable fee.

For consumer advocates, the idea of charging a customer who has run out of money is like kicking someone when they’re down. The average overdraft fee is $33.38 per transaction, according to 2017 Bankrate checking account survey.

Ultimately, it’s the customer’s decision to choose overdraft protection. In 2010, policymakers forced banks to make it an opt-in service.

The overdraft protection law “puts the decision in the hands of the consumer as to whether they want overdraft protection for small-dollar transactions conducted by ATM and debit card,” says Greg McBride, CFA and Bankrate’s senior economic analyst.

Should you opt in to overdraft protection?

Ultimately, opting in has two major benefits. It protects those who worry about finding themselves in the embarrassing situation of having their card declined. And it provides a temporary, if expensive, float between paychecks. People often turn to it to pay bills for essentials or emergencies.

Indeed, 32 percent of bank customers who overdraft say they see it as a way to borrow money when they are short, according to research from The Pew Charitable Trusts.

That’s a problem, according to Pew. Regulators intended overdraft protection for mistakes or occasional shortcomings..

“Overdrafters have a different perspective: A third of them see it as a way to borrow money
when they are short on cash,” Pew wrote in the study. “This leaves them without the protections of standard credit rules and regulations that govern other loans, such as clear disclosures
and reasonable time to repay via a ordable installments.”

Also, it is important to remember that overdraft protection covers debit card transactions and ATM withdrawals, not checks or other automatic debits from your account.

“Even though an ATM or debit card transaction won’t go through without our prior consent, if the balance is that low, the check written yesterday won’t clear and the online payment scheduled for tomorrow won’t clear,” McBride says.

Opting in can add up

Although you have to opt in for the service, some people don’t always remember doing so. The Pew study found that nearly three in four people who overdraft do not understand that they have the right to have transactions declined without a fee if their account does not have sufficient funds to cover a debit.

The problem is that fees can add up quickly if you didn’t realize you are overdrawn on your account. Imagine getting hit with a fee for every swipe—a $4 latte in the morning just became a nearly $40 latte. Your $10 lunch is now nearly $45, and so on. Costs can balloon quickly.

Some banks and credit unions have restructured their programs to be more consumer friendly and avoid this pile-on situation. For instance, Wells Fargo announced in November it would no longer charge an overdraft fee on transactions of $5 or less that overdraw an account. Other institutions have a daily limit on how much it will charge you for overdrafts.

Call your bank and figure out if you’re opted in and ask them to explain its policy.

Overdraft protection alternatives

If you’re looking for a less expensive way to ensure you won’t be turned down for a purchase or face hefty nonsufficient funds, many banks and credit unions allow you to link your checking account to a credit card, savings account or line of credit.

“Anybody can slip up once, and that’s the type of protection you’d like to have. In the event you do overdraw the account, it’s just a matter of moving your money from one account to the other, not borrowing from the bank to cover the shortfall,” says McBride. “And the charge for that is very nominal—about $10.”

Also, given all the digital tools offered by banks, keeping tabs on your checking account has never been easier. You can check it regularly, but you can also set up text or email alerts that tell you when your account drops a certain level. Many banks offer multiple alerts.

For instance, you can set one up for when your account drops to less than $75 and another for $25. Be sure to have one set with a good cushion given settlement times on transactions.

You can also break the cycle entirely. Some online banks and fintech companies have built their businesses around not letting you overspend and not charging overdraft fees.