overdraft-protectionHave you ever paid fees for overdrawing your checking account? Did it make you mad? It makes me mad, but mad at my own mistake. Mad that I never setup an overdraft protection account to make sure I would never have to pay that high fee again.

An overdraft protection account is typically a loan account (preferred line) or savings account from which funds are drawn if you happen to overdraw your checking account. Let’s say you’ve written a check, and unbeknown to you, it will take your checking account $5 into the negative. Without an overdraft protection account, the check would not clear and you would be charged a large fee (usually more than $30) by your bank for the hassle. If you have an overdraft protection account, then the needed $5 would be moved from your overdraft account to your checking account to cover your payment.

When you overdraw your checking account, banks and credit unions refer to it as NSF, non-sufficient funds, insufficient funds, overdraft, out of luck, etc. In any case, an overdraft protection account can protect from having that to pay overdraft fees and allows your payment to be made. This is a must-have account.

There are a few types of accounts that can be used as overdraft protection accounts

Line of Credit – This is basically a small loan that you only take out when you need it to cover you for overdraft protection. When funds are pulled out, you then owe them back at the current rate of interest on that account. If you pay the funds back within a few days, you typically can avoid paying more than a few pennies in interest.

Savings or Checking or Money Market Account – You can set up another account to cover you in case your overdraw your checking account. The money borrowed does not have to be paid back to yourself.

Credit Card – Very similar to the line of credit option, only this is usually a cash advance on your credit card to cover the overdrawn funds of your checking account.

An overdraft protection account costs you nothing unless you access it. It can cost very little to use if you choose the right bank or credit union. Most banks charge you a fee to access your overdraft protection account, unless you have a premier account or two with the bank. The fee to transfer funds to your checking account from you overdraft account is usually $10 or more. Most credit unions don’t charge any fee to access the account if it is a line of credit, and you only pay interest until the funds are returned to the line of credit.

Banks also tend to do something that feels a little shady here. Ideally, your overdraft protection account, when a line of credit, should only transfer the funds needed to cover the amount overdrawn. Many banks will transfer over $100 even if you only needed $.05. Not only do you pay a transfer fee, but you also pay interest on $100 instead of only paying interest on $.05. Perhaps they do this so they won’t have to transfer funds multiple times (with a fee each time) in case you continue to overdraw your account. Could it be so simple? It’s hard to say. That’s why you should see which banks or credit unions offer the overdraft protection without any transfer fee.