Should I Sign Up For Overdraft Protection?

Q: Overdraft protection on my checking account sounds like a super-helpful safety net.  Is it a good idea to sign up for this feature?

A: Overdraft protection can keep your account from landing in the red, but there can be disadvantages, too. Let’s take a closer look at this popular checking account feature so you can make an informed decision before signing up. 

What is overdraft protection?

Overdraft protection is a service offered by banks and credit unions that allows you to complete transactions even when you don’t have enough money in your account. When you sign up for overdraft protection, the financial institution covers the shortfall, typically by linking to another account you own or by extending automatic coverage that must be repaid with a fee. 

The cost of convenience

Overdraft protection ensures your transactions go through. However, this convenience comes at a price. Many banks and some credit unions charge an overdraft fee each time the service is used, which can range from $30 to $40 per transaction. If you continue making small purchases, you could incur multiple fees before you realize there’s an issue. 

[Here at Mutual Security Credit Union, we are proud to offer overdraft protection for our members without any/for the minimal fee of $XX per overdrawn transaction.]

Encouraging poor financial habits

When you know your purchases are covered, you may be less careful in monitoring your account balance and managing your finances. This can lead to dependency on overdraft protection.

Should I choose overdraft protection?

Overdraft protection may be a good option for you if your financial institution offers it for no or a low fee. However, you may want to institute these practices so you rarely have to use this feature:

1. Set up low balance alerts. This can help you avoid accidental overdrafts.
2. Link your checking account to a savings account. This way, funds can be transferred automatically to cover shortfalls, often with lower or no fees.
3. Maintain a buffer in your checking account. Keeping an extra $100 or $200 in your account can act as a cushion, thus reducing potential overdraft situations.
4. Use budgeting tools and apps. This way, you can monitor your spending and ensure you have enough funds to cover your transactions. 

Use our guide to learn about overdraft protection and how to use it effectively.