In short, overdraft protection is okay (at least if it’s free), but there are better options.
Here are the 6 things you need to know about overdraft protection:
Overdraft Protection Is a Loan That Keeps Your Checks From Bouncing
If you don’t have enough money in your account when you write a check or take money from the A.T.M., you’d automatically get a short-term loan. Your check wouldn’t bounce, and you could skip your bank’s overdraft fees, which are often about $25 each time your account balance goes negative.
BUT, You’ll Pay Interest, Even if Overdraft Protection Is “Free.”
Usually, the interest on an overdraft loan is pretty steep. You’d be paying a lot of interest to borrow the money that you should have had in your account to begin with.
Overdraft Protection Can Help You Pay Lower Fees
Look, we’d rather you pay no fees at all. But, generally, the interest payments are less than fees would have been—especially since you might get hit by a bank overdraft fee and a bounced check fee from the merchant.
You’re Spared the Embarrassment of a Bounced Check—At a Price
If you wrote a check to a business partner, that person wouldn’t know that you didn’t have the money. But, if you’re expecting more funds to clear shortly, the easiest way to avoid a bounced check is to call the person you wrote the check to. See if she can wait a few days before cashing it.
Spare Yourself the Grief: Get Savvy and Free “Overdraft Protection"
Don’t pay interest on a needless loan. Instead, open a savings account at the same bank as your checking account. Link the two accounts, so if you’re low on cash in your checking, money from your savings will automatically transfer over.
The Best Protection Is Simply Not to Overdraw
Check your account online regularly so that you’re on top of how much money is in your account. It’s that easy.