Banks offer overdraft services to prevent your checking account from over-drafting and triggering an overdraft fee. An overdraft happens when you write a check or swipe your debit card without having enough money in your account to cover the transaction.
When you sign up for overdraft protection, your bank will use a linked backup source that you designate, whether it is a savings account, credit card, or line of credit, to pay for transactions whenever the checking account lacks the needed funds.
Continue reading to learn more about overdraft protection and how it affects your credit.
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What is Overdraft Protection?
While most financial institutions operate independently and differently from one another, offering some sort of overdraft protection is routine.
Overdraft protection links your checking account to another account and uses that account to pay transactions that would have triggered an overdraft fee. If you have no linked account, it may charge a hefty overdraft fee.
Overdraft protection is a financial safety net for checking account holders — but it might not be the best option for everyone.
Credit Card and Line of Credit Overdraft Protection
Overdraft protection could affect your credit if you’ve linked your checking account to a credit card or line of credit as a backup source of funding.
When your overdraft is connected to a line of credit, you risk paying fees on the overdraft if you don’t pay the balance when its due or (if offered) before the grace period runs out. If you already have a balance on your line of credit, the overdraft would just be added to your current balance.
If you don’t have enough available credit on your credit card or line of credit, your credit card issuer may decline the transaction. This may also incur an overdraft fee anyway.
Impact To Your Credit
Overdraft protection is meant to protect you from issues that you may incur when you attempt to make purchases without having enough money in your checking account. However, if you can’t afford to payback the overdraft, you could suffer worse consequences.
For example, if your account overdrafts to your credit card and you later miss your credit card payment or default on the credit card, your credit score will be damaged.
If the overdraft pushes your credit utilization above 30%, your credit score could drop because of the higher credit card balance.
Optional Overdraft Protection
In today’s age banks now are required to ask you to opt-in or opt-out of overdraft fees. If you opt-out, your bank will deny debit card transactions that are greater than your checking account balance.
Instead, you would be charged a non-sufficient funds fee and you’ll have to take care of the transactions with the merchant.
Opting-in to overdraft fees means your bank will process transactions that are greater than your checking account balance and you’ll be charged an overdraft fee.
Overall, both are acceptable forms of money transfers. Typically, ACH are the best forms of payments and are more commonly used for bill payments, payroll, or any form of recurring payments. Being both convenient and inexpensive, it makes sense to wait those few extra days for a secured transfer. Also be sure to check out our own lists of bank promotions and CD tables!
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