OD Privileges Come with Thorns

Here's something thorny to think about: What would you do if your bank suddenly decided to withdraw your overdraft limit? While your bank may have been allowing you to treat your overdraft protection like a line of credit, don't think it'll go on forever.

Overdraft protection is sold to people as a way to ensure that if your account runs dry your debits won't bounce. OD can be useful for people who occasionally get to the end of the money before they get to the end of the month. I recommend it to people who are going through a big change of some kind: moving, divorce, widowhood. With lots of balls in the air, a slip at the bank could happen if you end up not having enough money in your account for a pre-authorized bill. Having OD means no NSF fee because a payment is declined. And if that payment was to your credit card company, your credit history won't get bruised resulting in a lower credit score and higher interest rates.

While overdraft protection is positioned as a big ol' favour the bank is doing you to ensure you don't bruise your credit history, the bank is, in fact, selling you credit. You'll pay for the privilege of using that credit when you run short of your own money both in fees and interest charges.

But make no mistake, the bank considers overdraft protection a privilege, one it can withdraw at a moment's notice.

For a lot of people, having overdraft means they can totally ignore how much money they have in their accounts because OD is their safety net. Some people live in overdraft, treating it like a line of credit and never being on the plus side for months on end. If you're this can of OD abuser, don't be surprised to find your bank accounts frozen because the bank wants its money back and it's not taking "no" for an answer. You won't be able to make deposits, withdraw cash, or write cheques. And the next thing you'll know, your "debt" been sent off to collections for being delinquent.

Can the bank do this?

You betcha buba.

Remember that overdraft agreement you signed? Didn't read it? If you had you'd know that if you stay in overdraft too long banks can suspend your overdraft privileges and freeze everything until you make good. Too long can range from days to up to six months, so every bank is different. And banks can get pretty heavy-handed when they decide to enforce the rules.  They're making the point that overdraft isn't a line of credit. And if you treat it as such, don't be surprised if you get a slap on the wrist.

'Course, if overdraft is only supposed to be a short-term solution to cover the odd misstep, one wonders why a customer would ever need coverage at the limits many banks hand out: up to $10,000. And if OD is only supposed to be a short-term solution, why have banks let so many customers live in overdraft for so long? Could it be the whopping interest and fees – sometime higher than credit card rates – they've been getting?

Don't use your overdraft protection as a license to ignore your cash management. The answer to running into overdraft is not overdraft protection, it is to better manage the money in your account so you don't try to spend cash you don't have.

Get yourself a notebook. When you put money in your account, add it to your balance. When you spend money from your account (be it a cheque, bill payment, a debit card transaction, or a cash withdrawal) deduct that amount from your balance. Keep your eye on the bottom line.

If you think that sounds like too much work, you're a dope. You'd work at least this hard to find where gas is selling for a penny less, or where tuna is two for $1.39, or where wings are all-you-can-eat for $3.99. Staying out of overdraft is one of the best deals going.

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