How to Understand Overdraft Protection

After working in the financial field for several years, I've found there are both a lot of advantages and disadvantage to overdraft protection according to your individual situation and your bank. Overdraft protection is not necessarily a bad thing to have on your checking account, but you should definitely look into the details of how your bank handles it. Long-term, it may cost you more money than it's worth, especially if you manage your finances well.

1) Look at the Pros of Overdraft Protection:

The biggest legitimate situation I've seen where overdraft protection comes in handy is for people who have direct deposit for their paychecks. People do normal things like buy gas and lunch on pay day, thinking they have money in their account when there's been an error in it getting deposited on time. It's not something that happens often, and really a better solution would be to keep enough cash on you for everyday expenses so you don't have to guess if the money is in there or not.

2) Factor in Online Banking:

There's also the issue of online banking that doesn't truly reflect your available balance. This is something I think many banks need to work on within reason because people think they're okay when they're really not. By the time they catch the mistake, they've already been hit with automatic fees. To solve this, try to keep a buffer of money in your account that you don't really intend on ever spending just in case something happens.

3) Find Out How Your Bank Process Debts and Credits:

According to how a bank processes debits nightly, some even put the largest amounts first (to supposedly keep people from bouncing their house or rent payment) but then have several smaller balances that hit soon after (with overdraft fees being attached to each one).

That honestly doesn't sit right with me, even as a person responsible with money. It makes the bank seem more like it's doing it that way to get as many fees as possible, not as a service to the customer (since one bounced check would be easier to clean up than several smaller ones when bank fees are factored in). It's definitely a question you should ask your bank when considering a checking account with them in the first place. Most won't tell you either way unless you ask.

4) Realize Some Banks Will Still Hit You With Fees Even With "Protection":

Based on our particular bank and the fact we have our finances under control, my husband and I did not opt for overdraft protection due to the fact the bank still charged fees even if you had it (they were just less). Unless we planned on going under a lot, it just wasn't worth it. With other banks it may be different. Ours had the option of either pulling from a savings account (which has a maintenance fee of $7 a month just for sitting still under a certain dollar amount) or from a bank credit card (we've stopped going into debt).

5) Last (and Most Important), Consider the True Sources of Your Overdraft Issues:

If you're going under on your checking account a lot, overdraft protection is not really the solution to your problem. You have to get yourself out of the cycle of spending more than you have and hoping things will "float" until money is really there. If you try to play games with this stuff, you're always going to lose.

It does take time and the willingness to sit down and figure things out, but a practical budget will help you more than anything. It's not so much about limiting you than just knowing what you have out so you don't go under. I hope that advice is more helpful to you.