Overdraft protection sounds like a great idea— on the surface. If you’re shopping with your debit card and you don’t have the funds to cover the purchase, your bank will cover it for you. While this might seem like a good thing, it comes with a price.
A study by the Consumer Financial Protection Bureau found that most overdraft fees are incurred on transactions less than $24 and that the average overdraft fee of $34 is usually paid back in about three days. That’s equivalent of taking a loan with a 17,000% interest rate!
How to avoid the fees
Set up text message alerts
Instead of opting in for overdraft protection you can set up text message alerts from your bank. That way when your account is running low, you’ll know before you make another purchase.
Opt out of overdraft protection
The CFBP reports that consumers who opted-in for overdraft protection pay on average $450 per year in overdraft fees (up from $260 in 2014) compared to just $35 for those without overdraft protection. If you’re already enrolled in overdraft protection don’t worry — just let your bank know you want to opt out. Without overdraft protection, your card may get declined but you’ll end up with a lot more money in your pocket in the long run.