How an Overdraft Line of Credit Works

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How a line of credit works

If you have a checking account, most major banks and credit unions will provide you with a small overdraft line of credit. This is a loan that is used in case you do not have enough money in your bank account to clear a check or other transactions. The overdraft line of credit will prevent you from having expensive fees by bouncing checks. If you just have $10 or less, it’s an easy thing to cover. If you are talking higher amounts of money, it may not be as easy for your bank to cover these costs. Let’s take a look at the different things an overdraft line of credit will be able to cover.

Bounced Check

Ever written a check that is greater than the amount in your checking account? While it is easy to think you can float a check for a few days, it can be dangerous! Writing a check for an amount that is higher than the balance you have and before your next payday can end up leaving you with a bounced check. If the amount of the bounced check is just a few dollars, your overdraft line of credit will cover it. If the amount is too high, you are likely stuck with a bounced check fee, overdraft charges, and a handful of other issues from the bank.

Do You Have An Overdraft Line Of Credit?

Check on your account to see if this protected is there or not. It may not be there with some accounts and this is something you need to look at. Make sure you have added it to your account in order to be safe with your money. Usually, the bank will cover up to $100. For higher priority clients, you may have about $1000 but you usually have higher monthly fees that you pay to the bank for your account.

Use It For Emergencies

Some people rely on their overdraft line of credit too often. Only use it when you actually need it! If you end up using it too often, you will end up having financial troubles and it’s easy to get into problems with your bank. Your bank may end up watching your account closely and they may even charge you higher checking account fees. Do not make it a habit to borrow from the line of credit or you will get into a bad spot with your bank and with your finances.

Savings Account

A great way to protect yourself is by opening a savings account with the bank. You need to make sure you have plenty of emergency funds set aside to care for your needs. Having a savings account is a great way to prevent bounced checks and other charges. Most banks will pull money from your savings account after using the $100 from your overdraft line of credit account.

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