What is Balance Protection?

Balance protection, also referred to as overdraft protection, is a service that many banks offer to their customers in order to prevent bounced checks or withdrawals leading to insufficient funds in an account. A separate type of balance protection is a type of insurance that many credit card companies offer, for which the customer will pay a monthly fee. Then, if the credit card holder loses his or her job, or for any reason cannot make the minimum monthly payment on the credit card, the protection insurance will kick in and minimum payments will continue to be made for a specified period of time. This prevents an account from becoming late or going to collections.

Both types of balance protection can be beneficial. A bank that offers balance protection on a checking account will generally cover checks that are written up to a certain amount, without returning the check to the addressee. The person who wrote the check may still be responsible for paying overdraft fees to the bank, as well as the original amount of the check, but at least the check will be covered. People who abuse this privilege may find that their bank will no longer offer this type of balance protection.

Balance protection insurance on a credit card may or may not be beneficial to the credit card holder. If one pays off the balance on the credit card every month, for example, then this type of insurance may not be necessary, since it will just add additional fees onto the balance. On the other hand, people with large credit card balances or tenuous employment situations may find this type of insurance to be very valuable. It is necessary to read any agreements carefully with the credit card company; often, the cost required for this type of protection can vary from month to month as the credit card balance changes.

Keep in mind that both types of balance protection are not intended to be used regularly, or to encourage irresponsible behavior with checking accounts or credit cards. They are only meant to be used for back up in an emergency, to prevent financial mistakes from negatively impacting one's credit. It is important to carefully consider whether or not this type of additional protection is necessary. Some people build their own balance protection into a checking account simply by "hiding" money in the account; for instance, one might keep an extra $500 US Dollars in a checking account without writing it in the checkbook.