What is overdraft in banking?
In: 0
Let’s say you’ve got $200 in your checking account.
You swipe your card for something that costs $230.
The bank will cover the transaction, but your account now has a negative balance. They will also likely charge you a fee for covering the transaction instead of rejecting it.
Overdraft is going negative in your bank account.
Overdraft protection allows this to happen, usually for a fee (and a limit of occurrence). It sounds like the opposite, but it’s “protecting” you by not declining a charge that may be a necessity, like rent.
Depending on the account type (like a youth checking) and the bank, protection is either off by default or not allowed (so it declines the charge).
Bank of America for instance charges $10 for each time you overdraft by >$1 (an odd aspect though is they only charge this fee 2x a day, so if you overdraft 5x in one day then you only get charges $20 in fees).
Depending on your bank, this may apply to checks and not debit card purchases (so you buying gas at the pump may get declined, but not your check for rent).
____
What’s really stupid are **NSF fees** (non-sufficient funds), which is where you don’t have overdraft protection, so it gets declined, but they charge you for this! Bank of America used to charge $35 when they had to decline a purchase (they also used to charge $35 for overdraft protection instead of $10, they used to also charge $12 if they had to pull from a linked savings account to cover the purchase; many banks still charge this linked transfer fee).
I’ve got a free overdraft facility at my bank, is that not common? They’ll charge me interest if I leave it in overdraft obviously, but I don’t get charged just for going into it…
There are 2 types of overdraft in Banking, so an overdraft is a lending product just like a Credit Card, Loan, or mortgage but with different terms & conditions of course
The types of overdraft I know of are Arranged & Unarranged overdraft.
The first one (Arranged overdraft) is when you apply for a certain limit of money that you can use on your current account for anything that you normally use your account for like paying bills or making purchases and transfers or ATM withdrawals, and the amount of money you are allowed depends on a few factors such as your Credit Score, income among others factors.
The second one (Unarranged Overdraft) which is only used if you are making certain transactions like Bill payments for example especially if it is a Direct Debit or a recurring card transaction (Subscriptions such as Netflix are called recurring card transactions), then your bank would cover you if you’re a bit short and how much it will cover also depends on similart factors to the arranged overdraft.
Hope this explains it 😂🤷
Latest Answers