WHEN YOU OVERDRAW your checking account, you’re borrowing money from the bank—and the effective interest rate could make carrying a credit card balance or taking out a payday loan seem like a bargain.
Banks might charge around $35 for overdrawing an account. A common scenario: You buy a $2 coffee with your debit card, which overdraws your account, and suddenly the $2 coffee is costing you $37. To avoid getting hit with overdraft fees, you can decline overdraft protection. This is a particularly smart move if you’re helping your teenagers open their first bank account. In all likelihood, your kids won’t have much money in their account and won’t keep close tabs on the balance. Declining overdraft protection will help them avoid a slew of $37 cups of coffee.
While declining overdraft protection will save on fees for ATM withdrawals and debit-card purchases, you’ll still incur fees if you write checks or have recurring electronic payments that overdraw your account. Instead of an overdraft fee, you might get hit with a fee for non-sufficient funds, while also getting charged a fee by the merchant you failed to pay.
Want overdraft protection? You could opt for coverage, but keep money in, say, a linked savings account. If you overdraw your checking account, the bank will cover the withdrawal with money from your savings account. You will still be charged a fee, but it might be $15 rather than $35.
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