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Overdraft protection or not?

Posted by Cheryl Costa  June 17, 2010 09:11 AM

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Have you been contacted by your bank lately and encouraged to sign up for overdraft protection on your accounts? It is very likely that you have been because new rules go into effect in the coming weeks and these rules require bank customers to "opt in" if they want overdraft protection.

Overdraft protection might sound like a good thing -- after all, who wants to suffer the humiliation of having a charge denied? However, the protection is exceptionally costly. Overdraft fees can run as high as $39 per overdraft. That means that if a $3 debit card charge at Starbucks causes your account to be overdrawn, you could incur a fee of $39 for protection against having that charge denied. And if you continue buying throughout the day, you could be on the hook for multiple $39 charges. For example, if you make six purchases that day, you could be hit with almost $200 in fees. That is certainly a steep price to pay.

So what is the best alternative plan? It is very easy (and much cheaper) to simply link your checking account with your savings account. That way, if you overdraw your checking account, money can be transferred from your savings account into your checking account. You will incur a fee for this service as well but the fee is significantly lower (generally $10 or less) and you will only incur this fee only once per day.

It is important to note that you may incur overdraft fees even if you don't choose overdraft protection. That is because the new rules do not cover automated monthly payments like your mortgage or electric bill. So, if a regularly scheduled bill causes your account to become overdrawn, you should expect to see a fee imposed.

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