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Overdraft Line of Credit

Everybody who has a checking account should try to get an overdraft line of credit because it can prevent bounced checks and eliminate overdraft fees.

In a checking account with an overdraft line of credit, the bank provides an amount of credit that is used to cover checks and payments when there isn’t enough money in the account to do so. This prevents checks from bouncing and keeps the checking account open.

An overdraft line of credit is not overdraft protection linked to a savings account. It is a line of credit often linked to a credit card.

How an Overdraft Line of Credit Works

The way an overdraft line of credit works is simple. The bank issues a depositor a line of credit attached to a checking account. If there isn’t enough money to cover payments or checks in the checking account the line of credit covers the checks and payments.

Many business checking accounts come with an overdraft line of credit called a business cash line of credit. The difference between an overdraft line of credit and a business cash line of credit is that a business cash line of credit is usually only available to businesses that run a lot of cash through their accounts.

Most consumers can get an overdraft line of credit connected to one of the bank’s credit cards. In this arrangement, checks or payments on the checking account that aren’t covered simply appear as charges on the credit card. That way the payments get made and the depositor’s checking account isn’t harmed.

Why You Need an Overdraft Line of Credit

Everyone who has a checking account should have an overdraft line of credit. The reason for this is that it is real easy to overdraw a checking account these days. It is possible for your checking account to get overdrawn without you realizing it.

Years ago it took often took several days or even weeks for a check to clear because a bank had to send the paper check back to the bank that issued it when it was cashed. Today, banks can use electronic images of checks such as faxes or scans and send them right to the issuing bank. This means that a check can be cashed the same day it is issued. Checking account holders no longer have the luxury of writing a check and knowing it won’t be cashed until after the money is in their account.

To make matters worse it still takes some companies several weeks to cash a check. This means that large checks you thought had cleared long ago might still be floating around and could be cashed and clean out your account at any time.

Even a person who carefully watches their checking account can fall victim to this because checking account deposits and withdrawals are done electronically. This means that the amount of money in your checking account can change instantly. There is often no way of knowing how much money is in the account to cover checks.

Prevent Overdraft Fees

A bank charges an overdraft fee every time a check or payment isn’t covered by the funds in the checking account. Banks are quick to charge overdraft fees because they make a lot of money off of them. The typical overdraft fee is now between $30 and $100 and the bank can charge it every time a check is presented for payment. If a check keeps coming back the bank keeps charging the fee.

This means that it is possible to have several hundred dollars in overdraft fees run up on an account in a few minutes. So overdraft fees can clean out your checking account in a few minutes. Everyone needs an overdraft line of credit to prevent this catastrophe.