Do you need overdraft protection?

Posted on by Forest in Debt, General, Opinion, Saving Money & Finances

• Tweet
• Email

• Tweet
• Email

From August 15th of this year (2010) the Federal Reserve put a new law into effect that basically says that banks are no longer allowed to charge overdraft fees unless you the customer opts into an overdraft protection program. This prompts the question Do you need overdraft protection?

What is overdraft protection and how does it work?

Before you answer the question it’s a good idea to understand what it is and how it could work for you. Prior to August 15th it was possible for the banks to automatically opt you into their overdraft protection program. This meant that if you went into your overdraft usually with a debt transaction that the bank could charge a fee, often up to $35. Now you have to opt in to this and it’s being pushed hard as an essential service.

If you do not have overdraft protection and you are for example making a purchase in a store then this is what might happen if you don’t have enough funds. You will put your card in the machine and it will just deny the transaction. No big deal really! You just simply don’t have the money and if you can’t pay in cash then you will have to leave the store without the goods. The banks are banking on this embarrassing situation being a reason to sign up.

If you do have overdraft protection but not enough funds then the bank would still clear the transaction. Effectively they will loan you the money but charge you a fee. Most banks are in the range of $10-$35 and may only charge once per day or for every transaction. Whatever the situation you could end up racking some very high bills if you make use of the service.

Back to the question, do you need overdraft protection?

The banks are making a very hard push to do everything in their power to make you sign up for this service. They are telling you it would be hell to go through the embarrassment. The convenience of the service could help you get through to your next paycheck and many other tales of why you need to sign up. Obviously they are not doing this for your own good, the overdraft industry is worth millions and millions to them and the August 15th law will cut that dramatically if they cannot claw you all back.

My perspective is that you do not need overdraft protection. This is a perfect opportunity to get out of the habit of using it. Having the opportunity to use money you do not have can tempt you to make purchases that you cannot afford! So what if your transaction is denied and you can’t buy that shirt until next week? Why is not having enough money embarrassing? Not many people do have enough money these days and it’s about time we all stood up and admitted it rather than letting the banks and credit cards companies bully us into pretending we are rich.

What do yo think, is it needed?

Tags: avoid overdraft fees, do you need overdraft protection avoid, do you need overdraft protection bank, do you need overdraft protection funds, do you need overdraft protection verb, do you need protection up overdraft, no more overdraft fees, what is overdraft protection