Personal Finance Advice

Overdraft protection covers you in case you attempt to make a purchase but have insufficient funds in your bank account.  Some overdraft protection accounts are revolving accounts while others are simply links to your savings account.  There are a couple of different schools of thought when it comes to overdraft protection.  Some financial experts say that it’s a great idea to have an overdraft protection in place for your checking account just in case you need access to additional funds or make an error on your check register.  Other financial experts argue that overdraft protection is a bad idea because it encourages people to overspend and usually incurs a bunch of costly fees.

Overdraft protection can be a good idea in some instances.  Everyone makes mistakes once in a while, so it’s nice to have a backup plan so your checks don’t bounce and your debit card purchases don’t get denied.  Ideally, overdraft protection should be linked to your savings account and not involve any fees.  There are a few financial institutions that do this, and it’s the best setup to have because you don’t wind up with a ton of fees and you’re not utilizing a revolving account that will incur interest.

On the other hand, overdraft protection can sometimes be a bad idea.  All too often people use overdraft protection as a way to finance purchases that they can’t afford, and this can turn into a bad situation.  Some financial institutions are happy to oblige these customers because not only are they paying overdraft fees, but they’re also doing it on a regular basis.

Financial institutions love customers who don’t mind getting a ton of fees.

Should you have overdraft protection connected to your checking account? The answer is yes, but only if:

1.  There is no charge to maintain the overdraft protection.

2.  There is no inactivity fee for the overdraft protection.

3.  The overdraft protection isn’t used as a line of credit.

4.  You only use it when you really need to. 

There is nothing wrong with having a backup plan as long as the overdraft protection remains just that: a backup plan.  Don’t use your overdraft protection to cover expenses that you don’t even really need to make.  This should be an account that kicks in when you don’t realize you’ve made an error in your check register, not an account that you use when you want to finance a weekend to Vegas but don’t have the available balance on your credit card to do so.

As with all personal financial matters, overdraft protection can be a wise decision when used as intended, and not frivolously.