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Is Overdraft Protection Worthwhile?

November 5, 2020

Imagine you are checking out at the grocery store, ready to buy a carton of eggs. It’s a small purchase — maybe $2.75 for a dozen. You hand over your debit card, completely forgetting that you only have $1 currently in your checking account.

This scenario can go one of two ways: if you have overdraft protection, the transaction will go through, and you can walk away with your eggs. If you don’t, though, then your card will decline, and you’ll face the associated embarrassment (and no eggs).

If this is how overdraft protection works, who in their right mind wouldn’t use it? Overdraft protection is not that simple, unfortunately. The service entails hefty fees that can rack up if you rely on it too often.

Banks cannot legally force overdraft protection on you. You must opt-in or out of the service, but there are pros and cons to consider before making your decision.

What is Overdraft Protection, and How Does it Work?

When you sign up for overdraft protection, your bank will cover a transaction’s costs if you don’t have sufficient funds. You can also set up a backup account to pull from when your checking account is too low.

Let’s say the bank covered the cost of your eggs in the above scenario. Your account is now overdrawn — only by $1.75 — but your bank gets to charge you a fee for lending you this small amount. According to Bankrate, the average overdraft fee in 2019 was $33.36. So, you avoided the embarrassment of a declined transaction, but you just purchased some extremely expensive eggs.

Overdraft protection also applies to ATM withdrawals, paper checks, and online bill payments. One in five Americans pay at least one overdraft fee each year, and banks collected a staggering $34.3 billion from consumers in said fees in 2018.

The Benefits of Overdraft Protection

The primary benefit of overdraft protection is that you can make purchases with insufficient funds. This feature can be advantageous if you’re in a tight spot or an emergency arises. Not being able to pay for a carton of eggs is one thing, but what if you owe $800 in rent, but only have $600 in your account? The $33 overdraft fee seems like a necessary evil to cover that $200 and hold you over until your next paycheck comes in.

As mentioned previously, you may be able to link a backup account with your own funds to cover an overdrawn checking account. You might be able to avoid overdraft fees if this is a sufficiently filled savings account, but you might also incur a fee if your backup source is a line of credit.

The Drawbacks of Overdraft Protection

Overdraft protection fees can perpetuate the cycle of poverty. There is probably a reason why your checking account only has $1 in it, so buying $36.11 eggs is more trouble than it’s worth because you need all of your next paycheck for other necessities. Those fees can rack up quickly if you frequently have insufficient funds for legitimate reasons (or if you exercise unwise spending habits).

Transactions can still decline if your backup account lacks sufficient funds, and your bank is unwilling to cover it. It’s possible to have a line of credit as a form of overdraft backup, but you will also have to pay interest fees because it’s technically a loan. To make matters worse, standard credit regulations don’t apply to borrowing money this way, so banks are not obligated to provide you transparent disclosures or a reasonable amount of time to pay it back.

In addition, overdraft fees can appear on your ChexSystems report (distinct from your credit report), which may impact your ability to open a bank account in the future if you overdraw your current account too often (on the other hand, merchants may also report you to ChexSystems for bad checks if you don’t have overdraft protection).

How to Avoid Overdraft Fees (Without Protection)

If you don’t want to pay for overdraft protection but worry about having insufficient funds, you can sign up for text or email alerts that notify you when your balance is low. This way, you can replenish your account before making your next purchase or use a different form of payment.

One example of these apps is Earnin, which not only provides low-balance alerts but lets you access money you’ve earned but haven’t received yet without mandatory fees or interest. You can use this feature to help ensure your bank balance stays positive.

Overdraft protection has its advantages and disadvantages. When deciding if it’s right for you, consider how often your checking account is low, what your expenses look like, how regularly you are paid, and what your alternatives are.


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Please note, the material collected in this blog is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or Services.

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2Disclaimer: Balance Shield cash out is subject to your available earnings and daily pay period max. Other restrictions and/or third party fees may apply. For more information visit earnin.com/TOS.

3NO PURCHASE NECESSARY TO ENTER OR WIN. Must be 18 years of age or older and a legal resident of the U.S. or DC. Games begin each Sunday starting 12/6/20 at 9:01 p.m. ET and end the following Monday at 9:00 p.m. ET with the last Game ending 12/19/21. To download the App, view the Official Rules, odds disclosures, prize details, and alternate means of entry, visit https://www.earnin.com/wewin/. Void where prohibited. $10,000,000 grand prize payable over 29 years. Sponsor: Activehours, Inc. (d/b/a Earnin ®), 200 Portage Ave, Palo Alto, CA 94306.

4Disclaimer: Up to 2 days early is based on comparison with traditional banks. Exact timing is dependent on your employer's payroll policies. For more information on eligibility and requirements of Earnin Express, visit earnin.com/TOS.

5Source: Internal analysis conducted by Earnin on December 10, 2020.

1Restrictions on use of Services and/or third party fees may apply, see Earnin.com/ privacyandterms for details.

2Balance Shield cash out is subject to your available earnings and daily pay period max. Other restrictions and/or third party fees may apply. For more information visit Earnin.com/privacyandterms.

3Tip Yourself Account funds are held with Evolve Bank & Trust, Member FDIC and FDIC insured up to $250,000. Tip Yourself is a 0% APY and $0 monthly fee service. Other restrictions and/or third party fees may apply, see Earnin.com/privacyandterms for details.

1Lightning Speed may not be available to all Community Members. Cash Outs may take up to thirty minutes, actual transfer speeds will depend on your bank connection. Restrictions and/or third party fees may apply, see Earnin.com/TOS for details.

2Restrictions and/or third party fees may apply, see Earnin.com/TOS for details.

3Balance Shield cash out is subject to your available earnings and your daily pay period max. Other restrictions and/or third party fees may apply, see Earnin.com/TOS for details.

4NO PURCHASE NECESSARY TO ENTER OR WIN. Must be 18 years of age or older and a legal resident of the U.S. or DC. Games begin each Sunday starting 12/6/20 at 9:01 p.m. ET and end the following Monday at 9:00 p.m. ET with the last Game ending 12/19/21. To download the App, view the Official Rules, odds disclosures, prize details, and alternate means of entry, visit WeWin Game & Sweepstakes Official Rules. Void where prohibited. $10,000,000 grand prize payable over 29 years. Sponsor: Activehours, Inc. (d/b/a EarninⓇ), 200 Portage Ave, Palo Alto, CA 94306.

5Tip Yourself Account funds are held with Evolve Bank & Trust, Member FDIC and FDIC insured up to $250,000. Tip Yourself is a 0% Annual Percentage Yield and $0 monthly fee service. Your Tip Yourself Account and any Tip Jars are not Savings Accounts. For more information/details visit earnin.com/tos.

6Up to two days early is based on comparison with traditional banks. Exact timing is dependent on your employer’s payroll policies. For more information on eligibility and requirements of Earnin Express, visit earnin.com/tos.

7Your Max on Earnin Express is up to 80% of your payroll or $1000, whichever is less. The 80% is dependent on you routing your full paycheck to Earnin Express. For more information on eligibility and requirements of Earnin Express, visit earnin.com/TOS.

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1Disclaimer: Restrictions and/or third party fees may apply, see earnin.com/tos for more details. Lightning Speed may not be available to all Community Members. Cash Outs may take up to thirty minutes, actual transfer speeds will depend on your bank connection.

2Disclaimer: Lightning Speed may not be available to all Community Members. Cash Outs may take up to thirty minutes, actual transfer speeds will depend on your bank connection. Restrictions and/or third party fees may apply, see Earnin.com/TOS for details

3Disclaimer: Community Member must have had at least 1 successful debit with Earnin. Limit to 1 Max Boost per pay period. A boost will not adjust a Community member's daily max. Restrictions may apply, see earnin.com/tos for more details

*Disclaimer: Balance Shield cash out is subject toyour available earnings and daily pay period max.Other restrictions and/or thirdparty fees may apply. For more information visit earnin.com/TOS

1Restrictions may apply, see earnin.com/tos for more details. Tip Yourself Account funds are held with Evolve Bank & Trust, member FDIC and FDIC insured up to $250,000. Tip Yourself is a 0% Annual Percentage Yield and $0 monthly fee service. Your Tip Yourself Account and any Tip Jars are not Savings Accounts. For more information/details visit earnin.com/tos

2Disclaimer: NO PURCHASE NECESSARY TO ENTER OR WIN. Must be 18 years of age or older and a legal resident of the U.S. or DC. Games begin each Sunday starting 12/6/20 at 9:01 p.m. ET and end the following Monday at 9:00 p.m. ET with the last Game ending 12/19/21. To download the App, view the Official Rules, odds disclosures, prize details, and alternate means of entry, visit https://www.earnin.com/wewin/game-rules/. Void where prohibited. $10,000,000 grand prize payable over 29 years. Sponsor: Activehours, Inc. (d/b/a Earnin), 200 Portage Ave, Palo Alto, CA 94306.

3Disclaimer: Restrictions Apply. See earnin.com/tos for more information

*Disclaimer: Up to 2 days early is based on comparison with traditional banks. Exact timing is dependent on your employer's payroll policies. For more information on eligibility and requirements of Earnin Express, visit earnin.com/TOS.

**Disclaimer: Restrictions and/or third party fees may apply, see earnin.com/tos for more details. Lightning Speed may not be available to all Community Members. Cash Outs may take up to thirty minutes, actual transfer speeds will depend on your bank connection.

*(*) Internal analysis conducted by Earnin in January 2021, represents total users who Cashed Out at least once from January 1 to December 31, 2020.

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