Overdraft Protection: the Good, the Bad, and the Ugly

When you open a checking account, you’ll likely be asked whether you want overdraft protection. Overdraft protection is a good deal for almost everyone. But it’s a bad deal for those who overspend…and it can be really ugly for debit card users who don’t monitor their checking account balances.

You may be wondering, how does bank account overdraft protection work?

If a payment you made gets presented to the bank and you don’t have enough funds in your account to cover it, your bank will charge you an insufficient fee (NSF). You may also be charged a separate fee by the business where you made the payment.

Next, you have to figure out how to make that payment that just bounced. However, with overdraft protection the payment is covered, even though you didn’t have enough money in your checking account.

Consider these three factors when deciding whether to add overdraft protection to your account.

Overdraft protection is a good deal for most people. There is a modest overdraft transfer fee, but it is a lot less than the penalty fees. So, signing up for overdraft protection is a no-brainer, right? Yes, for most people, but not for everyone. More on that below.

Once you decide you want overdraft protection, you need to select one of two types. One type links your checking account to another deposit account at the bank. If you overdraft your checking account, funds are transferred from your other account to cover the shortfall.

Of course, you may not have another deposit account available to cover overdrafts, so the other option is to apply for a Check Reserve line of credit. With this option, when you overdraft, the bank uses your Check Reserve to cover the shortfall up to the credit line limit. You will be charged interest until the Check Reserve is paid back. The longer it takes for you to pay it back, the more interest you pay, but it is a less costly option than paying NSF fees.

While a Check Reserve line of credit is a good service for most people, if you run up your line of credit and then can’t pay it back quickly, then getting Check Reserve was a bad choice. If that happens, future overdrafts will be returned with an NSF fee and you will also have the credit line to repay.

If you have overdraft coverage, you get to choose whether it extends to working with your debit card. Pick “yes” and an overdraft will be paid. Pick “no” and if you use your debit card with insufficient funds in your checking account, the transaction will be declined.

It’s a great service to know that you have overdraft coverage to cover your monthly auto loan payment or a utility bill, but should you set it up so every debit card transaction gets overdraft coverage? If you don’t keep close track of your checking account balance, a debit card with overdraft coverage can be ugly.

Consider this scenario: You keep buying stuff after all funds in the checking account are gone because the overdraft coverage allows for this debit card overspending. Only when the overdraft coverage is maxed out will the debit card no longer work. That can be a big surprise to users who may have made other spending choices had they realized they were spending in the red.

Of course, if you carefully track your checking account balance and know you are spending into the overdraft with your debit card, it can be valuable protection. What if you are away from home and low on gas with close to $0 in your checking account? Using that debit card, knowing it won’t be declined means you’ll be able to buy the gas to drive home.

So remember, overdraft protection is generally a good deal for almost everyone, but it can turn bad or even ugly depending on how you manage your spending and your bank accounts.

If you have a Zions Bank checking account or would like to know how to open a checking account with overdraft protection, visit a local Zions Bank branch today.

Don Milne is Financial Literacy Manager for Zions Bank.