If you accidentally write a check when there is not enough money in your account to cover it, overdraft protection can kick in to cover the amount and basically save you from a bounced check. But overdraft protection can be a bad idea, especially when you are being charged a bundle for the service.
Of course, you never want to bounce a check, but it makes more sense to skip the bank provided overdraft protection, and instead build in your own system of protection. Why? Well, the fees for overdraft protection are quite steep.
Usually, your overdraft is covered by a linked overdraft bank account that will cover the money. When overdraft protection kicks in, the money is transferred from that account automatically, and the bank will charge you an average of $35 for the transfer. Per transfer. So, if you overdraft on three checks, you will pay a separate fee for each one, even if they occur at the same time. Since the bank considers the overdraft a loan, it will charge you interest on the overdraft amount. Some banks go one step further. If you fail to pay the overdraft and the fees within five days, you’ll be hit with a second overdraft fee of $35. $70, plus interest, plus coverage for the overdraft. Whew. Expensive.
Keeping an eye on your accounts and expenses is the best way to prevent a problem, of course, but if you are nervous, there are a couple of steps that you can take to eliminate the expensive overdraft protection service while still being covered. You can build in an extra cushion of money that you pretend isn’t there. This way if you write a check before an automatic deposit kicks in, you’ll be covered. You can also take advantage of the low balance alerts that many banks provide for free.
Since many bank accounts automatically came with overdraft protection services and the extra fees, it pays to take a look at your accounts carefully, to see if overdraft protection is engaged.