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Is overdraft protection a good idea?

Kathryn Elizabeth Tuggle is a seasoned New York-based personal finance editor and writer who adores saving, investing and thrift store shopping. After getting her start writing about small businesses for the Inc. 500 at Inc. Magazine, Kathryn learned her way around the NYSE and NASDAQ while working at the The Financial Times. In 2007, Kathryn joined the Fox Business Network before its inception and was instrumental in launching the company's small business and personal finance sites. Obsessed with all things spending, saving and social media, you can find Kathryn tweeting her latest adventures with Dimespring at @KathrynLizbeth. 

With car insurance, life insurance, identity theft protection and travel insurance, there are as many ways to protect your finances as there are to mess them up. When it comes to banking, consumers can sign up for overdraft protection to insure against overdrawing an account. But for responsible money managers, is it worth it? We checked in with experts to find out the pros and cons of overdraft protection.

On the surface, overdraft protection sounds like a great idea — if you’re making a purchase with your debit card and you don’t have sufficient funds in the bank, your bank will automatically transfer funds from a linked account (such as a savings account) to cover the purchase.

Consumers can avoid being embarrassed in the check-out line, but they can also rack up some hefty fees — anywhere from $10 to $35, according to a survey by Bankrate.com. 

READ: How can single parents make ends meet?

“The old adage ‘prevention is better than cure,’ comes to mind when the subject turns to overdraft protection,” says Niall Wells, CEO of online budgeting tool Planwise. “But for many small businesses or low income earners, overdraft protection can prove more effective than the fees from the bank.”

And while the fees usually aren’t horrible, they can add up if you make a habit of overdrawing your account. Bank of America and Chase both charge $10 every time they have to transfer funds into your checking account. At Wells Fargo, overdraft protection fees are $12 if the amount needed is $50 or less — but that fee jumps to $20 if the amount exceeds $50.

Although most people have overdraft protection set up to transfer funds from a savings account into a checking account when an overdraft occurs, a business account or a joint account shared with a spouse or parent will also work. But even more important than choosing which account to link is reading the fine print — even with overdraft protection, you can still be charged an overdraft fee if you run out of funds in your back-up account.

READ: Six steps to a great financial plan

“If you do choose overdraft protection, ensure you have messaging services (either email or text) from your bank to alert you to the overdraft to avoid high interest fees that may be assessed,” says Wells.

Your bank can alert you if you’re getting close to running out of money in all your accounts.

“Technology can certainly be your strongest ally when you maintain a low account balance and process numerous transactions,” Wells says. “In short, overdraft protection is useful if you can manage it, but prevention by managing your balance is always better.”

Andrew Schrage, founder and CEO of personal finance blog MoneyCrashers.com, says that overdraft protection isn’t necessary for people who have no trouble managing their money.

“I don't think you need overdraft protection,” Schrage says. “If you don't opt-in for such a service and you attempt a transaction for which you don't have sufficient funds, then the purchase will simply be declined.”

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In most cases, overdraft protection is a service for those who can't manage their own finances effectively, or those who are concerned about the embarrassment of a declined transaction, Schrage says, adding that he would rather have a transaction denied than be forced to pay a fee for the purchase to go through.

“Ultimately, overdraft protection allows people to spend more than they have, which is not a cycle one should get into,” he explains. “Furthermore, if you simply remain aware of your bank balance, overdraft protection becomes essentially useless and an excessive fee.”

For most consumers, there’s no need to link your checking account to your savings account, Schrage says. It’s possible to institute your own “overdraft protection.”

“For instance, make a deposit of $100 into your checking account, but do not record it on your transaction register where you balance your checkbook,” he explains. “That way, you have a built-in cushion of extra funds that you are not taking into consideration when you make your spending decisions. This strategy has worked well for me in the past when I've made purchasing mistakes, but have been covered by my financial cushion.”

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A Breakdown of overdraft protection’s pros and cons from Claes Bell, an analyst at Bankrate.com:

Pros:

  • No need to worry about being embarrassed at the check-out line. As long as there are sufficient funds in your linked account, you’ll be covered for the price of the bank fee.
  • In emergency situations like running out of gas or getting a flat tire, you’ll be guaranteed enough money to get yourself home or cover the cost of the repairs.
  • If money is tight between paychecks, you’ll have enough funds to get you through till the next payday.

Cons:

  • Fees can add up quickly.
  • If you do end up overdrafting your main account as well as your back-up account, you could be liable for hefty fees.
  • Overdraft fees are assessed on a per-day basis. If your bank charges fees of $10 per day, you could be looking at a hefty $70 charge at the end of a week of overdrafting.
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News

  • One person was killed and two others were hospitalized after a shooting in DeKalb County. Police were called to the 700 block of Creste Drive overnight Wednesday, DeKalb police spokeswoman Shiera Campbell said. When they arrived, they found a man shot in a building breezeway. “The victim stated he had been walking along Snapfinger Woods Drive when four males in a white car tried to rob him,” Campbell said. “When he ran, they shot him.”  Soon after, officers got calls reporting two more shootings in the area. At Snapfinger Woods Drive and Shellbark Drive, they found a man dead inside a white Jeep. It had smashed into a tree, Campbell said. Less than a mile away, another shooting victim was found walking with his brother on Snapfinger Woods at Miller Road. The victim’s brother told police his brother was shot in the parking lot of a Texaco station. Investigators are trying to determine what led to the shootings and if they are related. The survivors, ages 26 and 18, were taken to a local hospital, Campbell said. One of the victims was listed in critical condition and the other was listed as non-critical. Police are not releasing the names of the victims at this time, Campbell said. In other news:
  • Lawyers, advocacy groups and former colleagues now get their say on President Donald Trump's Supreme Court nominee. That's after Judge Neil Gorsuch emerged unscathed from two days of tough questioning at his confirmation hearing. Assured of support from majority Republicans, Gorsuch received glowing GOP reviews but complaints from frustrated Democrats that he concealed his views from the American public. Gorsuch, a federal appeals court judge in Denver, refused repeated attempts to get him to talk about key legal and political issues of the day. But he did tell Sen. Dianne Feinstein, who worried that Gorsuch would vote to restrict abortion, that 'no one is looking to return us to horse and buggy days.
  • President Donald Trump has used his traditional pipeline to the people to help gain support for his plan to abolish Obamacare. >> Read more trending news  Hours before the vote is set to begin, Trump posted a video that spells out what he says were lies given to the American people when the Affordable Care Act went into existence while not explaining what his proposed American Health Care Act, or AHCA, does. Trump also encourages people to call lawmakers to show their support of AHCA. NBC News reported that he does not have enough votes to pass the AHCA, but negotiations went into the night. The House is scheduled to vote on the plan Thursday. 
  • Four people including a police officer are dead and a suspect is in custody after shootings at a bank and a law firm in northern Wisconsin, followed by a standoff at an apartment complex that ended in a volley of gunfire. Police characterized the initial shooting at the Marathon Savings Bank in Rothschild on Wednesday afternoon as a domestic dispute, but have provided no details about the suspect or victims. Authorities said late Wednesday that there is no remaining threat to the public. Jason Smith, a deputy administrator for the state Department of Justice's Division of Criminal Investigation, said more than 100 officers are investigating and that more information will be released Thursday. The violence unfolded in a cluster of small towns south of Wausau, about 90 miles west of Green Bay. The officer worked for Everest Metro, a small, 27-officer force that serves Schofield and Weston. 'I would like to send all my thoughts and ask everybody listening, 'Thoughts and prayers to all the victims and their families.'' Everest Metro Chief Wally Sparks said. 'Please keep them in your prayers and be with our officers.' The shooting at the bank in Rothschild was reported around midday. Officers responding to a 'domestic situation' arrived at the bank to find two people were shot and the suspect had fled. It wasn't clear if those two victims were among the dead. A second call came about 10 minutes later from Tlusty, Kennedy and Dirks, a law firm in nearby Schofield. The action then moved to an apartment complex in Weston. A woman who lives in the complex said she looked out of her apartment window about 1:15 p.m. to see a squad car approach, and a few seconds later heard a gunshot and saw an officer fall. Kelly Hanson, 21, told The Associated Press she saw other officers put the wounded policeman in an armored SWAT vehicle and take him away. She couldn't tell if he was alive or dead and police have not said if this was the officer who died. 'I thought, 'What is going on?' I know what a gun sounds like, and thought, 'This isn't good,'' Hanson said. She stayed inside her apartment. The Wausau Daily Herald reported that SWAT team members entered the apartment building about 2:30 p.m. Hanson said she heard about 10 shots at about 4:45 p.m. and began to 'freak out.' Another resident, Susan Thompson, told the Daily Herald that she heard gunshots and screams. Police told the 21-year-old mother to stay inside with her 2-year-old daughter and to lock her doors. ___ Associated Press reporters Jeff Baenen, Doug Glass and Steve Karnowski contributed to this report from Minneapolis.