Overdraft protection: when it hurts, when it helps

By Priscilla McEver

Now that you've graduated from school, you may find yourself acquiring not only a diploma, but also heaps of debt and a whole new set of responsibilities. Credit card payments, car insurance, utility bills and maybe even student loans that were once covered by your parents are now resting squarely on your shoulders. You have a lot of choices to make and perhaps not a lot of money to make them hastily.

So, if you've decided to use a debit card to track most of your spending, you know there is nothing more infuriating than getting hit with an overdraft fee. And now you may be asking yourself, "Should I sign up for overdraft protection?"

Why overdraft protection?

Here's help to decide if enrolling in overdraft protection is right for you. Overdraft protection may be a good option for you if:

• You have a lot of traffic in your account. If multiple checks or several automatic payments go through your account each month, overdraft protection can provide you with an extra layer of safety to ensure that everything clears your account. Now that you're on your own or starting over, you may notice that everything seems to be due all at once: high-interest credit card debt, compounded by your student loan payments, utilities, cell phone bill, and rent payments. If you're feeling unsure about making withdrawals from your account because of payments waiting to clear, protection may be right for you.
• You want to avoid embarrassment when your card is rejected. If the embarrassment of having your card rejected at a restaurant or retail store gives you such intense anxiety that you would avoid it all costs, overdraft protection can be your best friend. It may not be the most rational of deal-breakers, but if, for example, you're entertaining potential job connections and networking during the week at social functions, having your card rejected when you go to pay for the bill is the last thing you want.

When to say "No"

If you find that these scenarios don't apply to you may not need overdraft protection. Think about declining overdraft protection if:

• You don't make a lot of purchases with the account and do not utilize recurring payments. One of your accounts may be for emergencies only, or perhaps you do not face the same financial responsibilities as most investors and taxpayers, even after graduation or beginning a new financial chapter in your life. Signing up for protection might be unnecessary in this case, and the high overdraft fees that banks typically charge could actually do more harm than good for your finances.
• You track your purchases and keep tabs on your account balance frequently. If you check your bank account daily and remember when your automatic withdrawals occur week-to-week or month-to-month, you've likely got your finances under tight control, and overdraft protection may do little to help you. Alternatively, if you're starting fresh in the personal finance world and have decided to use only cash for all transactions, you will know exactly how much of your funds you are leaving at one time. In this case, overdraft protection may be an additional hassle to your already-minimalist lifestyle.

Remember that overdraft protection is not a permanent fix--it's a temporary pass. If you find that you're making several overdrafts per month, there's probably a more serious and fundamental problem with your budgeting skills. In this predicament, think about giving your money management system a makeover with the help of a financially-savvy friend or financial professional.

Keep in mind that each overdraft protection program is different. You will likely have the option to link your checking account to your savings account, and some institutions may give you additional options such as linking to a credit card or home equity line of credit, so consider your options carefully.

Mistakes happen. After graduation you could be between jobs or freelancing to make ends meet. Sometimes a withdrawal may come too early or you're faced with a sudden emergency, inadvertently slamming your account with fees. Consider what kind of overdraft protection your bank or credit union offers and weigh your financial options. Does the enrollment outweigh the potentially heavy fees?