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Credit Myths: Overdraft Protection Will Protect Me

BOSTON (CBS) - Banks love it when you opt into overdraft protection on your checking account or debit card. They assure you that you will avoid the embarrassment of having your purchase denied at checkout.

But overdraft protection is expensive, particularly for those who routinely overdraw their checking account. This false sense of security is only putting a Band-Aid on the true financial problem: spending more than you make.

Even if the overdrafts result from legitimate purchases such as food or medicine, it is a better option to get to the root of the continued financial distress and solve it. Banks earned over $32 billion in overdraft fees in the year ending in June.

Some banks charge you interest on your overdraft and others charge a fee; anywhere from $15 to the highest I found was $39. Many banks put a limit on how many overdrafts they will allow in one day. I have found anywhere from 1 to 7.

So, if your paycheck was not deposited in a timely manner and you went shopping assuming you had money in your checking account you could rack up fees of as much as $245 for 7 overdrafts.

And here's the scary part; you may have done all small purchases, like buying lunch ($11), a pick up at the cleaners ($17), fill up at the gas station ($33), stamps at the Post Office ($47), bread and milk ($9) at the grocery store, a quick run into the drug store for Advil ($14) and the card shop for a birthday card and wrapping paper and ribbon ($10). Total spending $141.

If the bank had not warned you that you were overspending there could be a $35 charge for each of the overdrafts. That would have cost you $245 in fees. Almost twice as much as your purchases.

You should not spend what you do not have. You are digging yourself into a hole. A wise philosopher, Will Rogers, once said if you find yourself in a hole quit digging.

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You can hear Dee Lee's expert financial advice on WBZ NewsRadio 1030 each weekday at 1:55 p.m., 3:55 p.m., and 7:55 p.m.

Subscribe to Dee's Money Matters newsletter here.

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