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Overdraft Line of Credit

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An overdraft line of credit is a loan attached to your checking account. Instead of bouncing checks and paying large fees, you can borrow a few bucks and pay interest. When you spend all of the money in your checking account, you start borrowing against your overdraft line of credit. This page covers how overdraft lines of credit work.

Bounced Check Protection:

An overdraft line of credit is a form of overdraft protection. The line of credit is unique because you only pay for the amount of money you borrow -- not the number of items you borrow for.

Getting an Overdraft Line of Credit:

You can get an overdraft line of credit at a variety of banks. If you didn't set it up when you opened your account, just ask how to add an overdraft line of credit to your checking account.

Pitfalls:

Of course, it's easy to abuse an overdraft line of credit. There's nothing wrong with having a safety net to catch you when you make a mistake. However, you should not use your overdraft live of credit regularly. Constantly using it is a sign that you need to work on managing your money. Indeed, you can write a check against your account when you know it's empty, but you're playing with fire if you make a habit out of it.

Banks can refuse to cover transactions or close your overdraft line of credit. Misusing your line of credit (or using it too much) can make a good thing go away.

Loan Limits:

Overdraft lines of credit have a limit. Depending on your bank's policies and your credit quality, you might be able to borrow $100, $1000, or more.

Costs:

You typically pay interest on the money you've borrowed. You have to repay the principal plus a market rate of interest on any balance. In addition, you may have to pay an annual fee to have an overdraft line of credit on your account.

Example:

You have no money in your checking account, but several small charges hit your account: $4, $5, and $6. The total amount you’re short is $15. Your bank may charge 3 overdraft coverage fees of $35 each – one for each item. That’s $105 in fees to cover $15 in charges.

With an overdraft line of credit, you borrow $15 against the line. Your bank charges you interest on the loan at a market rate. You repay the loan within a few weeks when your paycheck hits your checking account. The total finance charge might be less than a dollar (or some minimum required charge of a few bucks).

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