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Understanding Overdraft Protection

By: Susan Verbeck, Chief Lending Officer

Posted on 11/28/2019 3:34:01 PM

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You budgeted for the month, transferred money to your checking account, and you had a great time with friends and family over the weekend.  But then you got home only to realize you spent a little more than expected and you overdrew your account. What happens next?

If you’ve set up overdraft protection, or your checking account has built-in protection, then you might have noticed money transferred over from another account to cover the overdraft. But you might have also noticed a fee for the transfer.

If you’ve never set up overdraft protection, and you attempt to spend more money than what’s in your account, then you might end up with a declined card. But there are other options out there besides paying fees and having the embarrassing experience of a declined card. Let’s take a look:

Connect Your Checking Account to Another Account

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The easiest and most common way to protect yourself from overdrawing your account is to link your spending account to another account. For example, if you use your checking account for unexpected expenses and purchases, then linking that account to an established savings account can cover you if you ever overdraw your account.

You’ll need to follow your bank’s or credit union’s instructions to set this up, and it’s possible it was set up for you when you opened the account. Check with your financial institution for more information. But make sure you understand the fees associated with this type of protection. In 2017, consumers spent $34 billion on overdraft fees. They can add up quickly, especially if you use your card over a weekend and multiple transactions process on Monday with fees for each overdrawn transaction. But, there are others ways to protect yourself from overdrawing your account.

Use an Overdraft Line of Credit

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An overdraft line of credit is a less expensive option for those who qualify. Just like it sounds, an overdraft line of credit is a line of credit that you can borrow from in emergency situations to cover the amount you’ve overdrawn. While overdraft protection usually charges a fee for each transaction, you typically will only be charged for each time you use the overdraft line of credit, regardless of how many transactions it covers. Just like any line of credit, you’ll also likely be charged interest, and there are often limits to the amount you can take out.

An overdraft line of credit is a good choice if you don’t make a habit of overspending, and you want to avoid overdraft fees from your financial institution. Just make sure you don’t overuse it, or you might end up spending a lot in interest and fees.

Take Advantage of Overdraft Privilege 

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Overdraft privilege is an excellent option for those who typically manage their money well but come across an extraordinary circumstance where they’ve overdrawn their account. It allows you to overdraw your account to pay for a transaction. Not all financial institutions offer overdraft privilege, but for those that do, it can be a lifesaver.

In this circumstance, the bank or credit union will determine if you are a customer in good financial standing, without a history of overdrawing your account. If that’s the case, your financial institution might cover the overdrawn amount and save you from compiling fees.

Of course, the best form of overdraft protection is to become financially fit. Keep track of every dollar you spend and know where all your income will be spent for the month. Community First offers a financial wellness program with courses and tools to help you meet your financial goals. Learn more about the moveUP program.