What Is an Overdraft? – Overdraft Protection Transfer and Overdraft Line of Credit

What Is an Overdraft? I believe you would love to know all about this topic. It has become one of those searched keywords online and it has been creating questions. So why don’t you dive in and see for yourself and get information about it?

What Is an Overdraft

What I will be sharing today will be very helpful because you are going to know what an Overdraft is and also what overdraft fees are, including how you can be able to avoid them, so if you are interested then read further.

What Is an Overdraft?

An overdraft simply occurs when there is not enough money in an account to then cover a transaction or withdrawal, but the bank will simply allow the transaction anyway. Essentially, it is an extension of the credit from the financial institution that is been granted when an account reaches zero. The overdraft simply allows the account holder to be able to continue withdrawing money even when the account has no funds in it or has insufficient funds to then cover the amount of the withdrawal.

Basically, an overdraft simply means that the bank allows customers to then borrow a set amount of money. There is also an interest on the loan, and there is typically a fee per overdraft. At many banks, an overdraft fee can simply run upwards of $35.

What Is an Overdraft Fee?

An overdraft is a loan is simply provided by a bank that allows a customer to then pay for bills and also other expenses when the account reaches zero. For a fee, the bank will simply provide a loan to the client in the event of an unexpected charge or an insufficient account balance. Typically these accounts will then charge a one-time funds fee and also interest on the outstanding balance.

How Does Overdraft Protection Work?

Under overdraft protection, if a client’s checking account enters a negative balance, they will then be able to access a predetermined loan that is simply provided by the bank and be charged a fee. In some cases, overdraft protection is been used to prevent a check from bouncing, and also the embarrassment that this might cause. Additionally, it even might prevent a non-sufficient fund fee, but in some cases, each will then type of fee will charge roughly the same amount.

What Are the Pros and Cons of Overdrafts?

The pros of the overdraft involve providing coverage when an account unexpectedly has insufficient funds, avoiding embarrassment, and also “returned check” charges from merchants or creditors. But it is even more important to weigh the costs. Overdraft protection can then often comes with a significant fee and also interest which, if not paid off in a timely manner, can then add an additional burden to the account holder. According to the Consumer Financial Protection Bureau, the customers who had overdraft protection, in fact, often paid more in fees than those without it.

Types of Overdraft Coverage and Protection

At most financial institutions, you have three choices when it comes to dealing with an overdraft:

Overdraft Coverage

Sometimes called “courtesy pay” or “overdraft privilege,” overdraft coverage is simply the most expensive option. You can then give your bank permission to then pay all ATM and also one-time debit card transactions that will then drop your checking account balance below zero.

This will typically result in a fixed overdraft fee, at a median cost of about $34 according to the Consumer Financial Protection Bureau — and also multiple overdraft fees can then arise from one transaction. Many banks charge an “extended overdraft fee” if you then leave a negative checking account balance unattended for several days.

Worse still, if you are not even aware that anything’s wrong, you might then keep making purchases or withdrawals — and even every new one could mean a new overdraft fee. Most banks put limits on how many overdraft fees you can get in one day, but even one fee is expensive.

Your bank, however, is also legally required to then ask if you want ATM and even one-time debit card transactions covered as part of an overdraft program. Saying “yes” usually is not then a smart move. If you do not opt-in, these types of transactions are just simply declined at no charge to you.

Opting out of Coverage

You can then decide not to participate in an overdraft program. In that case, all the ATM and also one-time debit card transactions that exceed the funds in your account will simply be rejected, and then you will not pay an overdraft fee. For other types of transactions — such as when a restaurant runs the tip you added to the bill after your meal — you will still then face a nonsufficient funds fee, also called a returned item fee. This generally costs the same amount as the overdraft fee, but you will then avoid getting hit with multiple bank fees from one transaction.

Overdraft Protection Transfer and Overdraft Line of Credit

Offered by some banks, this alternative, that is also called “overdraft protection,” allows you to link your checking account to another account, such as a savings account or a second checking account, to then cover the funds you need for a transaction. Some banks even will let you link to a credit card or a line of credit, though it is very important to realize that you might then be charged interest on the amount you use.

Banks typically do charge a fee, such as $10 or $12, for such transfers, but that is much cheaper than what the overdraft coverage can cost you. Plus, some banks charge this fee per day instead of per instance, so you would pay only once a day even for several transactions.

Opting out of Coverage

If you regularly get hit with overdraft fees, you might then want to change your approach to your banking. Here are ways to avoid overdrafting your account and also being charged a fee:

  • Opt out of overdraft coverage. Opting out of the overdraft coverage simply means that the bank will then simply decline any transaction that would overdraft your account.
  • Keep an eye on your account balances. Many banks also allow their customers to set low-balance alerts on their accounts so that they will know when they are at risk of over-drafting.
  • Set up overdraft protection transfers. If your bank then offers free overdraft protection transfers, make sure that you have another account that the bank can then draw from in case your main account overdrafts.
  • Use a prepaid debit card. Prepaid debit cards can then give customers a set amount of money that they can also draw from, so if you do not have the funds for a transaction, it will be then declined.
  • Call your bank to see if it’ll reverse the overdraft fee. If you have then been charged an overdraft fee and do not have a history of lots of overdrafts, there is also a chance your bank might reverse the overdraft fee if you call the bank’s customer service team.
  • Switch to a bank that doesn’t charge overdraft fees. Some banks do not charge overdraft fees; they either decline a transaction that would then lead to an overdraft, or they simply have strong overdraft coverage programs. If the overdrafts are an ongoing problem, consider shopping around for an account that simply works better for your needs.

FAQs on Overdraft

Is It Good To Have An Overdraft?

An arranged overdraft is simply unlikely to have a major impact on your credit score as long as you do not go beyond your overdraft limit or then have payments refused. In fact, if you can use your overdraft sensibly and also regularly pay it off it could improve your credit rating.

What Happens If You Are In Overdraft?

The bank will also usually return (bounce) any cheques you write and some other payments such as direct debits from your account. If you then have an agreed overdraft and you take out more than the limit, the bank may then also reduce or stop your overdraft. Contact the bank and then ask how they can help you.

How Long Do You Have To Pay Overdraft?

In some cases, you have 5 business days or 7 calendar days to then fix your balance before the extended overdraft fee takes your account even deeper into the red. Some banks even charge this fee once every 5 days, while others go so far as to assess the fee every day until you bring your balance back above zero.

How Do You Pay Back An Overdraft?

How do you pay back the overdraft? An overdraft can simply be an expensive debt to have, so if you are in a position to then start repaying the overdraft, try and simply tackle it as soon as possible. Unlike loans or credit cards, there is no repayment plan for an overdraft so it is up to you to pay it off.

See This Also: 

Previous articleWhat Is a Chip-and-PIN Card? – Best Credit Cards with Chip and PIN Security
Next articleWhat Is a Check Cashing Service? – How Does Check Cashing Work


Please enter your comment!
Please enter your name here