Most people use their checking accounts to make payments through checks for their monthly bills and household expenses. This system of check payment is convenient as it saves one from the hassle of carrying around money. It saves a lot of time too.
The Interest Charged By An Overdraft Line Of Credit Is Lesser
Sometimes we may accidentally overestimate the balance in our account and continue to write checks against it even after it is empty. In other words, we might end up withdrawing money from an empty account - this is called as an overdraft or overdraw. This may cause your check to bounce. Also the company or shop may charge you penalty charges. In such situations too, some banks may allow you to borrow money from them by providing the money for these bounced checks. This kind of loan by the bank is called as overdraft protection. It has to be repaid by the account holder along with interest.
There are two ways in which overdraft protection can be provided by the bank. In one system, the bank will charge you a fee every time you need to borrow money to prevent your check from getting bounced. For instance, if you have written two small checks against your empty checking account, the bank will charge the same fee for each loan irrespective of the amount of the check. This fee may sometimes turn out to be much higher than the total amount borrowed from the bank.
A better method of overdraft protection is called the overdraft line of credit. In this method, you can borrow the total amount that you need to pay altogether in checks after your account is empty. The bank will charge you interest only on the total amount borrowed and not on the number of times that you have borrowed. This system turns out cheaper for the account holder and also saves him the embarrassment and charges caused by a bounced check.
One Should Not Use His Overdraft Line Of Credit Habitually
You can ask for an overdraft line of credit facility at the time of opening your checking account or add it later to your account. The bank will charge you an annual fee for this facility. This line of credit turns out cheaper for the account holder as the interest charged is comparatively lesser than borrowing separately for every bounced check. The amount that one can borrow against his line of credit will depend on the amount of money present in his account. Generally, an account holder can borrow from $100 to $1000 through this system. Some banks may also allow a line of credit of up to $5000 if you have a good amount in your account.
An overdraft line of credit is like a short term loan which you have to apply for with the bank. This indicates that you will have to repay the loan within a small period with a certain interest. Once the person’s salary check is deposited in his account, the amount is directly deducted by the bank. If the account does not have sufficient money to repay the line of credit amount, then the account holder will also have to pay a late fee. It is important to find out all these details before you apply for this facility.
One should try not to make a habit of borrowing against one’s overdraft line of credit. Ideally, we all should do expenditure within the limit of the money present in our accounts. If someone borrows too frequently against his overdraft line of credit, then it indicates that he needs to budget his monthly expenses wisely. Also, the bank might withdraw your line of credit if you use it too frequently. Hence, we should try to use this facility only during an emergency when you need to spend extra even though your account is dry.