When opening a checking account, you may be asked if you want to opt into overdraft protection. However, you may not have a clear idea and what this is or why you would need it. Here is a brief explanation of what overdraft is and the different types of protection.
WHAT IS OVERDRAFT?
Overdraft is a program that many financial institutions have in place to protect your checking account from going into a negative balance.
HOW DOES IT WORK?
Depending on the type of coverage you have, this type of account protection may work in different ways.
WHAT TYPES OF COVERAGE ARE THERE?
There are three main types of overdraft protection:
Linked to Savings
With this method, your checking account is linked to your savings account. In the event you make a purchase for which there are not enough funds, the money will be automatically pulled out of your savings account.
Line of Credit
This type of coverage has your checking account linked with a line of credit. Like the above example, when your account doesn’t have sufficient funds for a purchase, the money will be pulled from your linked line of credit. You may need to pay interest on these charges and will need to be approved for a line of credit, which may affect your credit score.
Many financial institutions offer personalized overdraft options to fit the needs of their customers. This usually means your financial institution will cover your overdrawn account, to a certain limit, and then the account holder will pay a fee.