When you withdraw some amount from your bank account and if it exceeds the available balance, it is called an overdraft. A few basic points on overdraft line of credit, and how it works are mentioned herein.
Under normal circumstances, you cannot withdraw more than what you have in your bank account; however, if the bank permits so, you can withdraw an amount in excess of what you have. This is called an overdraft line of credit. It is a kind of loan, which is connected to your checking account. You can use it to fund your purchases, instead of using checks, which you know would bounce; or using credit cards and then paying huge fees and interest. Instead, you can borrow few bucks this way, and pay the accompanied interest later on.
When you and the bank agree for an overdraft protection plan, you mutually decide the maximum amount, which you can use as an overdraft. If the amount you withdraw is within this agreed limit, then there is a nominal interest charged at an agreed rate. On the other hand, if you withdraw in excess, the fees charged will be more, and there can be a higher rate of interest.
Application Process
The application process is nothing different from applying for any other credit, be it a loan or a credit card. The first step you should follow is checking your credit score. You should check for any discrepancies and outdated information, as these may affect your chances of getting a better deal. Once you have checked your credit report and made the necessary changes, you can apply for a line of credit with your bank. You can either apply for it online, or go to the bank in person. In fact, whenever you open a bank account, you can opt to open it, as well. However, in case you don’t want to, you can apply for it later, as and when needed.
Charges
Depending on the bank with whom you are applying for it, you may or may not be charged an opening fee. Usually, you do not pay anything when you apply for it, and unless you use it. Whenever you opt to use it, you are charged some amount everyday, which varies from one bank to the other. You have to pay interest on the amount you have borrowed.
Advantages
This line of credit acts as a protection against bounced check and fees associated with them. Moreover, whenever you need money, you can always use your overdraft limit to pay for your utilities and necessities. In addition, it is comparatively cheaper than other types of credit, as the interest charged is less. Depending on the amount of money you have in your bank account, the amount you can borrow varies. Usually, you are allowed to borrow anywhere between USD 100 to USD 1,000. However, if you have a good credit score, you may be allowed a line of credit of USD 5,000 or even more.
Pitfalls
Though this form of protection acts as a safety net, there are times when you may be tempted to overuse it. However, you need to make sure that you do not use it regularly. Using it constantly means you need to start managing your money immediately. Yes, you can pay your bills, whenever you do not have money in your account, but remember that you are playing with potential danger, which later on, may become a habit.
Thus, you can use your overdrafts provided by the bank, whenever you are in need of extra cash, but make sure that you don’t overdo it, as it may land you in trouble later on.
