How and When to Use Your Credit Card for Overdraft Protection
Posted by: Staff Writer | Jul 15,2007
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It happens to even the most financially responsible people. Being zapped with an overdraft charge on your checking account can be as simple as one of your automatic payments coming out a little early. Suddenly, you're short just a few dollars, causing a negative balance in your checking account, and even $1 short is often enough to garner you an overdraft fee.
There are ways to get around this. Banks offer opportunities to link savings, money market and other accounts to your checking account to cover these types of fees. However, there is another option. If your credit card comes from the same bank as your checking account, you can often link the two and use your credit card for overdraft protection. This can save you from large fees and the embarrassment of bouncing checks, but there are some pros and cons to doing this. Consider the facts below before making a decision to use your credit card for overdraft protection.
Things to Consider When Using Your Credit Card for Overdraft Protection- What are the interest rates? To make it worth your while, the interest rate on your credit card must be low, also known as low interest rate credit cards. Otherwise, you will be costing yourself money in the long run.
- What is the overdraft fee? If the overdraft fee is $25 each time you bounce a check, but to setup overdraft protection on your card costs a fee of $50 and the bank charges $10 each time your credit card bails you out, it may be cheaper to pay the overdraft fee. Be sure to check your overdraft protection policy when you are purchasing your credit card.
- What is bank policy? Some banks will withdraw money from your credit card and place it in your checking account instead of charging your card a fee for overdraft protection. This is considered a cash advance and will typically cost you a fee in addition to higher interest rates. Find out if this is the case with your bank.
- Connecting your credit card to your checking account adds to your protection against identity theft. You are sure to be protected if a thief makes off with your credit card, running up a balance.
- Check into your grace period. Make sure that your credit card has a grace period of at least 20 to 25 days before using it for overdraft protection. If not, you'll find yourself with finance charges, transaction fees and a number of other charges when it would have been cheaper to pay the overdraft charge.
- Be sure of your credit limit. If your credit card has a low credit limit and your checking account has a lot of activity, it may not be a good idea to use it for overdraft protection.
Your bank will have overdraft protection options for you to choose from. Don't be afraid to ask questions of your bank. Not all of them will charge the cash advance fees when used for overdraft protection and many will waive other fees in these cases. The whole idea behind using your credit card for overdraft protection is to make out cheaper. If this isn't the case, don't do it. Instead, go for the banks cheapest option and develop a strategy for always keeping your checking account in good standing.
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