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What is Overdraft Protection and why is it Important?

What is overdraft protection? And do you really need it? Doesn’t your credit union just give it to you automatically? If you are asking yourself these questions, then you’ll want to learn more about this important protection. No, it’s not automatic. And there is a very good reason for that. Let’s look at what overdraft protection is and why it is important.

What is Overdraft Protection?

Overdraft protection is a service offered by banks and credit unions. This service allows a payment that you have made to someone like the electric company, Walmart or your babysitter to be paid temporarily even if you do not have enough money in your account to cover it. This is like receiving an automatic short-term loan from your bank to cover the charge. But like any loan, you will need to pay a fee for using the loan, typically between $10-35, or it may include a daily interest charge, depending on your arrangements with the credit union. And like any loan or line of credit, you must actually request this privilege to receive this service.

Why it’s important

Overdraft Protection is great for several reasons:

  • It prevents charges like return check fees from the company being paid, which would often be higher.
  • It also allows you to avoid the embarrassment or damaged trust if the payment was to someone with whom you frequently do business like your local car repair place or your child’s school.

And in the case that that payment was really important:

  • It allows you to avoid disruptions in service like having your water shut off or not being able to get gas for your car when you are on empty.

If it’s that important, why wouldn’t my trusted credit union just opt me in automatically?

It is important that members understand that if they are using overdraft protection, their expenditures are exceeding their available balances. While this can happen to anyone from time to time, if it is happening on a regular basis, it may require a rethinking of the family budget, better communication among those using the account, better tracking of payments, etc.

If this benefit were available without opt in, then a valued member might not really understand that they are using a short-term loan. Or they might think that their debit card would be declined if they had insuffitient funds and continue using it freely. It is very important that people know that this is borrowed money that your credit union is giving you temportarily to help avoid an inability to pay for something needed. And because of this, your credit union offers you the ability to opt in if you would like that protection.

Know your limits

Your credit union may have limits on this protection that you will want to understand. For example, the fee may be per $100 that you go under your available balance. It may limit you to a certain amount per day. Or they may revoke your prviledge if you are perceived to be “abusing” the protection by not keeping enough in your account to cover charges on a regular basis. Ultimately, these limits are member protections that help members avoid depleting their accounts through paying fee after fee.

It pays to get overdraft protection

The benefits of overdraft protection make it a very important tool in your financial toolkit, but like all tools, it is important that you are using it wisely. Ask your credit union about adding overdraft protection to your account. And always be ready for the unexpected in life.

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