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Overdraft Protection

June 27, 2019

Banks sell overdraft protection as if it is somehow beneficial to consumers, but to even the best of budgeters it can be problematic.  The protection is there simply to protect you from yourself and your tendency to overspend.  But what happens if you dip into overdraft and stay there for extended periods?

Often people have secondary forms of overdraft attached to their bank accounts in the form of lines of credit.  Unexpected bills or charges that put accounts into overdraft followed by a regular, larger, payment such as rent or mortgage payment, without there being enough money in overdraft, may cause the bank to move money from your line of credit as back up.

While, on the face of it, this all sounds very helpful, in that clients don’t fall behind on bill payments and are not incurring NFS fees, the net result is the accumulation of more debt.  More debt means larger payments over longer terms, the only beneficiaries are the lenders.  Overdraft protection confers little, if any, actual benefit to people to people who manage the money well.

The simple act of refusing the bank’s offer of overdraft protection can save bank clients tens of thousands of dollars in interest and service charges.  However, make sure you are budgeting properly and not spending money you don’t have.