This post comes off a pretty pissy experience I had yesterday after my paycheck bounced :(

Everything worked itself out and i'm no longer upset/worried/scared of our company going down the tubes, but I did wanna share my thoughts on overdraft protection as it has a lot of value!

First of all, did you know that you could even do that? Every bank differs, but I have yet to come across one that doesn't allow you to tie a credit card (especially one from the same bank) to your checking account for overdraft protection.

What this does is cover yourself in case your checking account takes a nose dive for whatever reason, and your balance goes under $0.00. You only have to do it once, and it literally takes 2 minutes to set up - either doing it yourself online, or just calling up the bank.

So let's say, for example, you write a check for $200 and your account only has $125 in there. Well, normallly, you're bank will pay that $200 to whomever you sent it too, and then charge you a crazy high fee of $30 and up for the inconvenience (if the check was for a larger amount, the bank may do it differently - like reject the payment of it), but not only that, you'd now have a negative $75.00 balance! Or actually -$105 with the fee included :(

Now, hopefully you'd catch this pretty soon and fill it back up and over the $0.00 mark so that your bank doesn't charge you for each day it's in the negatives, but you'd have to be pretty anal like me and check your account every morning to catch it so soon ;)

The Pros of doing this.
Consider tying it to your credit card now. In this case, as soon as your balance goes under $0.00, it triggers your credit card and fills your checking account back up to keep it over in the positives. So that $75 difference will be taking from your c/c and xfered into your checking account right away - although usually the bank will round it up to the nearest hundredth, in this case xfering over $100 - thus eliminating huge overdraft fees! Well, most of it anyways, you'll usually get a small fee attached for this called a "Chargeback Fee", but it's usually lower at only $5 or so depending on your bank.

What this also does is give you peace of mind knowning that should this ever takes place, your bank corrects it while you're sleeping, golfing, or doing who knows what besides checking your bank account ;)

The (possible) Cons of doing this.
I say "possible" becuase it really depends on your personal situation. If you're great at managing your checking and credit card accounts, then these may not affect you as much as those who aren't.

Con #1: If you have a high interest rate on your credit card, it may not be worth it - at least if you can't pay the amount off rather soon. Because remember, while your checking account now has money back in it, you will also have a charge on your credit card now. And not any old charge, but a "cash advance", meaning you will start accruing interest on day 1. Now, if you can pay this off no problemo especially if we're only talking about a few dollars here, then no harm no foul. But if you take a $500 hit at 17% and you can't pay it off anytime soon, then the whole thing might be more trouble than it's worth.

CON #2: If you have convenience checks out on that c/c with lower rates, you have to pay those off FIRST before you can touch this "cash advance" portion. This is where it BLOWS, and I should know as it literally just happend to me yesterday :(

Remember, I have two checks out right now on my personal credit card - one at $3,100 for my Caddy, and one for $4,300 for the difference of my Highlander car loan. So when this check bounced yesterday for $1,700, the overdraft feature kicked in and quickly xfered this amount onto my card. As it stood, I would have had to pay off $7,400 at my 3.4% conveneince check rate FIRST, before i could pay off that $1,700 overdraft amount at 5%!!! It's better than 15% or 18%, but it still sucks. This is because credit card companies always apply your payments to the lowest interest items first.

Now, being the frugal guy i am, i promptly called USAA and kissed enough a$$ until they reversed it for me so i could avoid it alltogether ;) I was still negative $1,700 in my checking account, but i just used my Emergency Fund (thang GOODNESS for that!) to fill it up until i can get it corrected here at work. I also switched the protection from my personal card to our other card to avoid any hassle in the future...something i should have caught from the beginning.

Overall I think connecting them are a good idea.
You get charged a small fee in exchange for the security and peace of mind knowing your checking will be okay :) Would you all agree? While dealing with all of this sucked for me yesterday, today i am back to being happy and thankful for being able to blog it all away! haha... After all, there's always something to learn when it comes to money, right?!

Labels: checking account, credit cards, money management, overdraft fees