An overdraft facility is a loan tied to your checking account. If you run out of money and you have been approved by your bank for this type of add-on, the line of credit can cover costs so you won’t bounce checks, miss payments or have your debit card denied. Some banks also allow you to access the line of credit if you need emergency cash.

The money that you use as a standard loan provided by your bank so that you pay interest on the amount you will borrow. However, overdraft lines of credit are often less expensive than traditional overdraft protection programs, which typically charge around $ 35 for each rejected transaction that hits your account.

An overdraft facility provides an option for overdraft protection, but there are other options. Keep in mind that overdraft protection is optional so you don’t have to add anything to your account, but your bank may still charge you even if you never chose to get overdraft coverage.

 

Funds keep paying

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It’s always best to keep a cushion of cash in your checking account, but sometimes mistakes and surprises can catch you off guard, and it’s good to have a plan for such situations. If your checking account runs dry, the result will depend on the type of cost your account beats and how your account is set up.

One-Time Debit Card Transactions: If you buy your debit card for day-to-day or use ATM withdrawals, your bank can simply reject the transaction as long as you never opt-in to any type of overdraft protection like a overdraft credit, for example. In this case, you can use another payment method or just do it without. However, if you have chosen to have some kind of overdraft protection, you will use this service.

Preauthorized Payments: Recurring monthly bills that your account will be hit by ACH will most likely still be processed by your bank, even if your checking account is empty. In these cases, you will either pay a fee for not having enough funds again, often around $ 35, or you will have some form of overdraft protection.

Checks: Yes, people still write checked. If you write a check for more money than is available in your account, your bank may or may not allow the check to go through. Again, if you have regular overdraft protection, it will cover the exam as long as the amount is within the limits. If not, your bank could allow checking on your feet, causing numerous fees and headaches.

 

Pitfalls

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An overdraft line of credit is less expensive than traditional overdraft protection and allows you to keep spending in emergencies. But it is dangerous to be able to rely on any form of overdraft protection. Your bank will eventually cut you off if you use it too many times, and you’ll pay more in fees than you need. It’s best to balance your account and sign up for notifications so you know when you’re running low on funds.

Cost: Overdraft lines of credit, while cheap, are not free. You will have to pay interest on money you borrow. If you only borrow for a day or two, the cost is said to be extremely low. But you may also have to pay a small fee every time you dive into the overdraft facility, so the more you use it, the more you will cost. The per-occurrence fee could be around five dollars. Finally, some banks charge a modest annual fee to keep the service on your account.

Limits: There are usually no tight limits on how often you can use an overdraft facility, but banks get worried about customers who use it too often and they could eventually close your account. There is usually a dollar limit on the line of credit to prevent you from borrowing too much. Depending on your credit and potential needs, you can secure an overdraft line of credit for $ 500 or $ 1,000, although some banks have lines with a credit line of up to $ 10,000.

Alternatives: There are other options here too. If your main risk is extra spending with your debit card, you can simply opt out of overdraft protection. Your bank will reject your card and you can find another way to pay. Your bank could also allow you to set up a transfer from your savings account – instead of lending money to the bank, use your own cash. The savings transfer fee is generally similar (you can set it up so your savings account is used before you borrow a line of credit).

 

Get an overdraft facility

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To apply for an overdraft facility, contact your bank. Be sure to ask about all alternatives, such as a savings account transfer, and be familiar with the fees. Once it’s in your account, use it as little as possible.

 

Example

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You have no money in your checking account, but several small fees hit your account: $ 5, $ 6 and $ 7. They are short for a total of $ 18. Your bank can charge three overdraft coverage fees of $ 35 each for each item. That is $ 105 in fees to cover $ 15 in costs.

With an overdraft facility, you would borrow $ 18 against the line. The bank charges you interest on the loan at a rate comparable to credit cards and may cover a fee like $ 5 apiece. You repay the loan within a few weeks when your salary hits your checking account. The interest could be less than a dollar, or a minimal fee of a few dollars, and you will pay $ 15 instead of $ 105 in fees as you would with standard overdraft protection.