The Protection Predicament: Overdraft Protection Can Be a Blessing — Or a Curse
The overdraft protection law “puts the decision in the hands of the consumer as to whether they want overdraft protection for small-dollar transactions conducted by ATM and debit card,” says Greg McBride, CFA and Bankrate’s senior economic analyst.
Ultimately, opting in has two major benefits. It protects those who worry about finding themselves in the embarrassing situation of having their card declined. And it provides a temporary, if expensive, float between paychecks. People often turn to it to pay bills for essentials or emergencies.
Indeed, 32 percent of bank customers who overdraft say they see it as a way to borrow money when they are short, according to research from The Pew Charitable Trusts. That’s a problem, according to Pew. Regulators intended overdraft protection for mistakes or occasional shortcomings.
Also, it is important to remember that overdraft protection covers debit card transactions and ATM withdrawals, not checks or other automatic debits from your account. Some banks and credit unions have restructured their programs to be more consumer friendly and avoid this pile-on situation. For instance, Wells Fargo announced in November it would no longer charge an overdraft fee on transactions of $5 or less that overdraw an account. Other institutions have a daily limit on how much it will charge you for overdrafts. Call your bank and figure out if you’re opted in.
If you’re looking for a less expensive way to ensure you won’t be turned down for a purchase or face hefty nonsufficient funds, many banks and credit unions allow you to link your checking account to a credit card, savings account or line of credit.