Is It Better to Overdraft a Checking Account or a Credit Card?

June 22, 2015, Written By Bill Hardekopf
Overdraft Concept.

In desperate times, having the ability to overdraft your checking or credit card account can come in handy. It’s like an instant personal loan without having to fill out an application. Of course, this loan has to be paid back right away because it comes with hefty fees that could get you in financial trouble. If you are forced to spend more than you have available in one of your accounts, you might want to make sure to choose the right one. Is it better to overdraft a checking account or a credit card account?

Overdraft Fees vs. Over-the-limit Fees

When you use more than your available balance in your bank account, you receive an overdraft fee. When you do the same with your credit card, you receive an over-the-limit fee. Both of these fees are issued by the company controlling the account as a way to make up for fronting you the money. Those fees generate a lot of money for the bank or credit card issuer. But the fees also serve to discourage consumers from overspending on a regular basis.

The amount of money you pay for each fee will depend on your bank or credit card company, as well as the terms on your account. When you use money that is not already available in your account, most banks or credit card companies will charge $20-$35 per transaction. If three charges come in after your account has been depleted, you would be charged three fees or $60-$105. As you can see, these fees will add up quickly if you are not careful.

How to Avoid Overdraft Fees

The obvious way to avoid overdraft fees at your bank is to only spend the money you have in your account. If you do not keep track of your money well enough to do that, make sure you do not give yourself the ability to overdraft. Banks are now required to only let you overdraft your account if you “opt in” for this service.

If you have signed up to have overdraft protection, it may be wise to opt out of this service, so you don’t get charged in the future.

If you have a savings account or a secondary checking account, you may be able to link it to your primary account for overdrafting purposes. When you overdraft, the bank will first pull the money from that other account. You will still be charged a fee for this, but it may only be $5 instead of $25. This is an easy way to reduce the money you may have to pay.

Yet another option is paying off the overdraft before the end of the day. Some banks do not pull money out of your account until the end of the day. If you know that you have used too much money, immediately make a deposit to cover yourself. The cutoff time for banks varies by institution. Contact a representative for your bank to learn more.

How to Avoid Over-the-limit Fees

Once again, the best way to avoid over-the-limit fees on your credit card is to not give yourself the ability to exceed your limit. Credit card companies cannot allow you to go over your credit limit unless you “opt in” for this service. So make sure you have not opted-in for this. If you only have $5 remaining on your credit limit and you try to make a $6 purchase, your transaction will simply be declined. And no over-the-limit fee will be charged to your account.

If you have opted in and given yourself the ability to go over your limit, make sure to keep a close eye on your credit card account to make sure you don’t go near the limit. Check your account online on a regular basis. If you are hovering near your credit limit, you may want to make an online payment to your account well before the due date. That may minimize your chance of exceeding your limit.

What Should You Overdraft: Bank Account or Credit Card?

So, is it better to overdraft a bank account or a credit card? The best answer is “neither.” Overdrafting or exceeding your credit limit is a terrible habit, especially if you do it on a regular basis. It will quickly lead to more debt, and may cause the financial institution to shut down your account altogether. Make sure you have not opted-in for this service on your checking or credit card account. If you have done so, change that immediately.

The information contained within this article was accurate as of June 22, 2015. For up-to-date
information on any of the terms, cards or offers mentioned above, visit the issuer's website.