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Credit Cards As Overdraft Protection |
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by: Debbie Dragon
A large percentage of the population is currently struggling to keep up with their debt repayments. To err is human, though, and it is not uncommon for someone to make a simple mistake that ends up costing big bucks! You already know that making a payment a day or two late will result in a late fee – often one that is higher than the minimum amount owed on a credit card. If you make a late payment or skip a payment all together, chances are you will also experience an interest rate increase on that account – as well as any other credit card account you have (under the Universal Default clause).
Even when someone writes checks and makes their payments online before the due dates, the potential for an error is possible – and a simple mathematical error in a checking account can accumulate expensive overdraft fees. If you have ever made an error in your check register, you know how quickly overdraft fees can add up! It takes awhile to receive notification of your error from the bank – and in the meantime, if you do not realize the error has been made, you could continue to spend more money than you have available – particularly since each check or transaction that takes place once a checking account is “out of money” results in an additional overdraft fee ($20 to $40, depending on the bank's policy).
With overdraft protection through your bank in the form of a line of credit, should you make an error in your checking account, the bank will automatically pull from the other account and avoid the overdraft fee. Some banks do charge a fee for this overdraft protection, however it is less than what you pay per transaction if you should overdraw your account.
There is another option for overdraft protection that consumers may not be aware of. Credit cards can be linked to many checking accounts to be used for overdraft protection. Deciding whether or not this is a cost-effective option for you will depend on how much your credit card charges for a cash advance. If your bank charges $40 per overdrawn transaction and the credit card company charges a cash advance fee of $10, it may make more sense to link your credit card with the checking account to use for overdraft protection. If you don't have a line of credit option or savings account to use for overdraft protection, the credit card may be a cost effective back up resource with lower fees than bank overdraft charges.
Not all banks will allow you to use a credit card for a backup funding source, so if this is something you're interested in doing you would need to find a bank that offers this option. When you are looking for a bank account, here are a few questions you can ask to make sure the bank offers you what you are looking for before you open the account:
Q. How much do you charge for overdraft fees?
If you're lucky enough to find a bank with low overdraft fees, you may not have to worry about anything else!
Q. Can I link my credit card to my bank account to use as overdraft protection and how much is the fee to transfer money from the credit card in the event I overdraw my account?
Ask this question of your bank, but also check with the credit card you intend to use as your back up funding source to see if and what kind of cash advance fee they will charge you for this service.
Q. Is using a credit card for back up funding your least expensive option or could you apply for an account with a lower overdraft protection fee or an account that allows you a line of credit or connection to a savings account?
Your best option is a bank that allows you to connect a savings account to use as back up funding. If you overdraw the checking account, it will automatically pull money from your savings account. But if this option is not available to you, you'll need to resource the other options to find the least expensive way to handle any potential overdrafts.
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Credit Card Articles > Credit Card Education > Credit Cards As Overdraft Protection
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