Using credit card for overdraft protection

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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.

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, 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.”

In addition, she says, payment is guaranteed. With a courtesy overdraft (the default for customers without a savings account or credit card linked to checking), the bank may decline the check.

But consumers who like the idea might have to shop around to find an institution that offers it.

“I don’t think it’s an emerging trend,” says Arnold, who tracks various card services through his site.

Wells Fargo Bank also offers the overdraft protection option with its credit cards. Customers are charged a flat fee that varies with the amount of each overdraft check or debit, says a bank representative. For up to $25, it’s $10. For $25 to $100, the cost is $12.50. For $100 to $500, it’s $15. For anything more than $500, the cost is $20. There is also a finance fee that varies, depending on the individual card agreement.

But the service is not automatic. Customers have to notify their institutions and enroll in the program. Often enrollment is free and the only requirement is that the checking account and the credit card are both from the same institution.

Consumers should ask some questions to make sure they’re getting a good deal.

Must-ask questions:
What’s the institution’s overdraft fee?
Is there a transfer fee for backstopping checking account using a credit card?
What other fees could be incurred if money is pulled from your credit card?
Is there a cash-advance fee?
If the bank triggers a cash advance, will you have to pay a higher APR?
Can you pay off cash advances separately?
What is your credit limit?
Is this the cheapest option your bank offers to cover overdrafts?
What protection do you have in case of fraud?

What’s the institution’s overdraft fee? Since this is the amount you want to save, it makes a nice yardstick for comparing the fees you’ll pay if you set up an overdraft protection program.

Is there a transfer fee if you use a credit card to backstop your checking account? Many times there is. Sometimes it’s a flat fee. Or it can vary with the amount of the overdraft.

What other fees could be incurred if money is pulled from your credit card? Some institutions will charge multiple fees for the service. Find out in advance about all potential fees and the amounts.

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.