The Pros and Cons of Overdraft Protection

As one of millions of Americans with a “free” checking account, I also represent an account that generates a minimal profit for the bank. Minimal profit, that is, unless I happen to overdraw my account. Protection is normally thought of as something that keeps you from harm. As such, overdraft protection sounds like it should save you from accidental overdrafts and the associated fees, but does it?

One of the largest problems that face people who have overdraft protection on their bank account is the “minor fee” that banks assess if their computers believe that you have insufficient funds in your account to cover a debit. In my case, my balance never dipped into the negative until the bank assessed their “protection” fees. One particularly large debit, made immediately after a large deposit, caused the bank to initiate “overdraft protection” for my account, not because I had a negative balance, but because their computer was concerned about the size of my deposit.

The bank’s overdraft protection system started by assessing a fee of $31 for that debit, and then added another $62 after they discovered two other checks pending that their bank fee would cause to bounce, and so on. Over a three-day period, with me ignorantly continuing to make small purchases, the bank tallied up over $340 in “overdraft protection” fees. Since then, with the interest and other “fees” building up, the amount has now topped $600 in less than a month.

This situation is illustrative of the largest drawback that overdraft protection includes. Overdraft protection offers you a false sense of security because the bank will “take care” of you in case of insufficient funds when your mortgage payment hits. The bank will “loan” you the money for a minimum fee when an unexpected emergency arises and you have to have money fast. Unfortunately, it only means that the bank will make the profit whenever you bounce a check, not the merchant to whom you bounced the check.

Overdraft protection has the advantage of paying your creditors even when you do not necessarily have the money; however, it can quickly become an albatross around your neck. If you inadvertently trip one of the many “triggers” that your bank has set to flag your account with an overdraft, and you may not realize that owe the bank for the first “overdraft” until your bank has multiplied the infraction and added several hundred dollars in fees to your negative account balance.

Overdraft protection has many benefits. However, if you really need protection, then you should look for a bank that either charges no fees or keeps the fee minimal for the service. Additionally, you must take precautions to protect yourself from the bank by keep all receipts, even the receipt that you receive from the ATM when you check your balance. You never know when that receipt will come in handy.