What Is an Overdraft?
An overdraft happens when you don’t have enough money to cover a transaction, but the bank allows it anyway. Even when an account has no funds or insufficient funds to cover the withdrawal amount, the overdraft allows the account holder to continue withdrawing money. In other words, the bank gives you extra money when your account runs out.
An overdraft is when a bank allows a customer to borrow a set amount. There is interest on the loan and usually a fee for each overdraft. Many banks charge an overdraft fee of $35 or more.
Understanding Overdrafts
A bank is covering payments a customer has made that would otherwise be rejected with an overdraft account or, in the case of actual physical checks, would bounce and be returned without payment.
An overdraft loan is where the borrower pays interest on the outstanding balance. Often, the interest on the loan is lower than the interest on credit cards, making the overdraft a better short-term option in an emergency. There are typically additional fees associated with overdraft protection, which can reduce the number of funds available to cover checks or withdrawals – for example, insufficient funds fees per check.
Special Considerations
You can use your bank funds to cover your overdraft, or you can link your overdraft to a credit card. If the bank uses its funds to cover your overdraft, it won’t affect your credit score. However, if a credit card is used for overdraft protection, it’s possible that you can increase your debt to the point where it could affect your credit score. This, however, will not show up as a problem with overdrafts on your checking accounts.
Suppose you don’t pay your overdrafts back in a predetermined time; your bank turns over your account to a collection agency. This collection action can affect your credit score and get reported to the three main credit agencies: Equifax, Experian, and TransUnion. The sentence is unclear.
Overdraft Protection
Not all, but some banks will automatically pay overdrafts as a courtesy to the customer (while charging fees, of course.) Overdraft protection provides the customer with a further tool to prevent embarrassing shortfalls that poorly reflect your ability to pay.
Another checking account, a savings account, or line of credit is usually linked to your checking account. If there is a shortfall, this source can provide the funds, thereby preventing your check from being returned or your transaction/transfer declined. It also helps you avoid triggering a non-sufficient funds (NSF) charge.
The amount of money you can spend when you don’t have enough in your account to cover a purchase varies by account and bank. One thing to remember about overdraft protection is that banks typically charge a fee for the service. Often, customers need to specifically request this service.
If the overdraft protection is used excessively, the financial institution can remove the protection from the account. Customers should be sure to use it sparingly and only in an emergency.
What Is an Overdraft Fee?
An overdraft is a bank loan to a customer when their account reaches zero. There is typically a one-time funds fee and interest charged on the outstanding balance for these types of accounts. The fee for the loan is charged when the customer pays for their bills and other expenses.
How Does Overdraft Protection Work?
If a client’s checking account enters a negative balance, overdraft protection will allow them to access a predetermined loan from the bank. This service is typically used to prevent a check from bouncing and the embarrassment that this may cause. It may prevent a non-sufficient fund fee, but in many cases, each fee will charge roughly the same amount.
What Are the Pros and Cons of Overdrafts?
It’s important to weigh the costs, but the pros of overdraft involve providing coverage when an account unexpectedly has insufficient funds, avoiding embarrassment and “returned check” charges from merchants or creditors. The Consumer Financial Protection Bureau reports that customers with overdraft protection often pay more fees than those without it. This is because overdraft protection often comes with a significant fee and interest, which, if not paid off promptly, can add burden to the account holder.
