January 14,2007

•  

  The Perks and Perils of Overdraft Protection

  One way for banking financial centers to boost their credit card sales is to offer overdraft protection to account holders. Many banking customers are not aware of this service, in which a credit card is tied to a checking or savings account to absorb any overdrafts. On the surface, the idea sounds like a win-win situation: banks stand to open at least two accounts for interested consumers, and consumers have a way to circumvent costly overdraft fees, which tend to irritate bank customers like nothing else. As with almost anything else, however (and especially in opening a new line of credit), it pays to read the fine print before taking advantage of a really great-sounding deal.
  
  Wachovia claims to have been the first bank to offer its credit cards as overdraft protection, 15 years ago. Some unscrupulous branches of individual banks have been known to solicit customers for "free overdraft protection," not letting them know that it involves running their credit. This can lead to the unfortunate situation of the surprised consumer receiving a (seemingly) unwarranted piece of plastic in the mail a week later. Also, most overdraft protections, whether by card or another deposit account, do charge a fee. Granted, this fee is usually in the ballpark of $10, which is a lot cheaper than the $25 - $40 generally charged on a straight (unprotected) overdrafted account. Of course, using a credit card in this manner begs the question of interest – is the overdraft being charged as a regular transaction, or as a cash advance? Those that process overdrafts in the first way are truly a benefit to the consumer – essentially, a cash loan for the length of the grace period before being charged interest. The latter method, however, will lead to the consumer being charged a (usually high) rate of interest from that day forward, making the fee more expensive than it might first seem.
  
  Only research into your particular bank's policies regarding overdraft protection can determine whether this scheme is good for you, or not. It is a fact that the overwhelming majority of checking/savings account holders never overdraw their accounts. On the other hand, those that do so are likely to be chronic offenders, who could really save money on the service.
  
  
  
     Back to Articles Main Page