Overdraft Protection: Why You Should Consider It

You've probably noticed that your bank is pestering you to sign up for overdraft protection. That's because there's a new federal law that says if you don't opt in for this program by August 15th, your existing checking accounts will no longer carry this protection. (Consumers need to opt in for it on new accounts by July 1.) Many financial advocates hate this fee-driven service and are telling folks to dump it. While I concede that some customers are better off without this potentially pricey insurance policy -- especially those living paycheck to paycheck -- the rest of us may actually want to keep it.

Why would I recommend a program that's chock-full of fees? For the simple reason that my family isn't perfect and yours may not be either.

When I was single, I had a pretty easy time staying on top of my finances. I had no trouble keeping track of my spending. But it's more challenging for couples. My husband and I keep multiple checking and savings accounts and we don't call each other every time we want to make a purchase. We need to give each other a little financial freedom to keep our relationship healthy. But that free rein could potentially lead to some overdraft issues.

Imagine this scenario: my husband buys me a lavish anniversary gift and wants to keep it a surprise until we go out to celebrate. While innocently shopping for jewelry, he doesn't realize that our daughter's day care center is going to debit our account on the same day. (The fees are charged quarterly and seem to happen at random times.) If he doesn't think ahead and transfer money from our savings account into our checking, the child care payment won't go through. Since it's generally my job in the relationship to monitor our cash flow, I can assure you he would never think to transfer funds.

We could just promise ourselves to use more discipline and stay on top of our account balances. And the reality is that in our 11 years of marriage, we've never bounced a check or come up short while using a debit card at the supermarket. But the risk of something falling between the cracks is too high for my conservative ways.

I don't mean to be dramatic, but I think you should be aware that if you do bounce a check, it goes on your "record". John Ulzheimer with Credit.com explained to me that banking institutions use a fraud monitoring service called ChexSystems, which keeps the equivalent of a credit report on all of us. (Some banks also use something called Early Warning Services.) But instead of tracking our loans and loan payments, it keeps a file on our banking activity, including bounced checks. If you have too many black marks, you may experience difficulty opening a new account.

It's tough to say how many bounced checks will get you in trouble. Every bank has a different set of criteria, Ulzheimer says. But I can tell you that I found plenty of angry consumers ranting about these two monitoring companies online. In some cases, bad information on a report stemmed from simple misunderstandings or a single bounced check. Banking customers then had trouble getting the bad data removed from their files.

Will everyone encounter problems if they bounce a check or two? Probably not, but I'm not willing to take a chance and end up with one more headache that takes hours to resolve or work around.

Are you planning on signing up for overdraft protection? If not, why?

Stacey Bradford is the author of The Wall Street Journal Financial Guidebook for New Parents.

Commerce Bank Card 2 image by The Consumerist, courtesy of CC 2.0.