Editorial Policy

Is Credit Card Overdraft Protection Worth It?

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By Eva Norlyk Smith, Ph.D.
January 12, 2010

When the new credit card rules step into effect at the end of February, cardholders can no longer be charged an over-limit fee unless they opt in for overdraft protection, which would allow consumers to charge over their credit card limit, within limits. By July 1, similar rules will apply to debit cards and ATM transactions.

But is overdraft protection worth it? Firstly, you’ll be charged an overdraft fee, which on credit cards can run as high as $39, for the pleasure. Secondly, apart from saving you the inconvenience (and embarrassment) of having a charge denied, overdraft protection on credit cards affords little benefit.

Card issuers offering overdraft protection are likely to couch it in rosy terms, but don’t be fooled Over-limit protection is more to their benefit more than to yours. There are many good reasons to avoid pushing your credit card limit to the max, and few reasons to go over the limit. In case you’re wondering which choice to make, here are some of the benefits of not having overdraft protection on your credit cards.

It forces you to keep track of charges. When you can’t go over the credit limit on your card, you have to be more disciplined about keeping track of how much you spend. This will force you to make choices and stay within your budget.

It reduces temptation. Having a firm ceiling on your credit card will help reduce one of the main downsides of credit cards: the tendency to overspend.

You avoid hefty over-the-limit fees. With overdraft protection, you could end up buying a for a $4 cup of latte without realizing that you’ve gone over your limit and end up paying a $39 over-limit fee for the pleasure.

An over-limit charge may only be allowed once or twice. An important protection in the new credit card law is that you can only be charged an over-limit fee once within each billing cycle. But this also could mean that you’ll likely only be given overdraft protection once or twice within each cycle, and after that your charges will be denied. So, you’ve paid $39 for next to no benefit.

Generally speaking, if you’re tempted to opt in for overdraft protection to get the benefit of being able to go over your credit card limit, you may want to take a closer look at your credit card habits. Regularly, pushing your credit card close to the limit could be a sign that you are living beyond your means and setting yourself up for trouble down the road.

Credit card overdraft protection won’t be offered by all card issuers. American Express and Discover Financial Services will not offer overdraft protection, and indeed are eliminating over-limit fees on credit cards altogether. Other card issuers may well follow. Why? Amex and Discover did the math, and decided that the costs and logistics involved in offering overdraft protection and keeping track of who is covered and who is not would likely exceed the earnings from the overdraft protection. Instead, many credit card companies are likely to allow cardholders to go over the limit on rare occasions without charging them, a service which unfortunately is not likely to be extended to repeat offenders.