If you have had to shell out precious dollars in the form of overdraft fees because the check you issued bounced at your bank, then you know the importance of having a safety net in your bank account. Most often you have funds to pay the check but they are just not in the right account or available at the time when the check is presented.
It is at times like these that the extra expense incurred in paying the overdraft fee is completely unnecessary and avoidable. An overdraft line of credit is a safety net for your bank account that ensures you avoid such charges and fees.
What is an OD Line of Credit?
An overdraft line of credit is simply a credit line extended to you by your bank for a particular account. The maximum overdraft that is available to you is defined when you set up the OD line. Once you set it up, whenever a check is presented and your account does not have enough funds to cover it, the OD automatically kicks in. The check is paid and you simply have to replenish your account to keep the OD line of credit active.
Charges and Fees
Your bank may charge you an annual fee to keep the overdraft protection active and usable. This cost should be taken into account when you consider opening an OD line of credit. This will be a recurring charge irrespective of whether you use the overdraft or not.
Every time you use the credit line, you pay interest on the amount used as well as have to repay the ‘principal’. Find out the rate of interest charged by your bank for overdraft usage before you open one. This way you avoid unpleasant surprises when you get your monthly bank statements.
Pitfalls to Avoid With OD Line of Credit
Avoid writing checks that your account will not cover simply because you know you have overdraft protection. Remember that this protection comes with a cost- the interest you pay. Making a habit of considering your OD protection as ‘money in the bank’ can lead to dangerous spending habits.
Ask your bank for its policies and regulations concerning these credit lines. Most banks can cancel the line or reject a check payment if they have cause to believe the OD is being overused or misused.
An OD line of credit is a good way to avoid incurring individual penalties on several bounced checks. With this credit line you simply borrow a small sum from the bank to cover a temporary shortfall by paying market interest for the duration of the loan.