Overdraft happens when you try to use more money that than the amount that is available in your current account. You should only use overdraft to deal with short term financial problems during emergency. Some people have bad spending limit and treat their overdraft limit as a spending limit which can result in accumulation of a lot of fees.
There are 2 types of overdrafts including authorized overdrafts where you agree with the bank in beforehand about an overdraft limit and unauthorized overdraft when you spend more than the amount in your bank account without any agreement about a borrowing limit in advanced with the bank. Unauthorized overdrafts will cost more than authorized overdraft and the fees and increase very fast.
For authorized overdraft, the type and amount of fees that you pay will depend on your bank. Normally, you will be charged with an APR for the authorized overdraft. You may also get charged with a fee every day, week or month for having the authorized overdraft account.
Often, you will see that the bank advertise that they are offering an interest free overdraft but the interest is usually only waived for the first few hundreds of dollars that you overdraft on your account. You must remember to always stay within the overdraft limit if you don’t want to get charged with extra fees for your authorized overdraft account. If you know that you are going to exceed the overdraft limit, you can ask the bank to increase the limit temporarily. You should not delay until the last minute because your account has already gone into the red by that time.
In unauthorized overdraft, you get charged with an overdraft fee if your bank make the decision to pay for the amount. If the bank decides not to pay for the amount, you will be charged with a non sufficient funds fee. The overdraft fee usually includes a transaction fee which is charged when you overdraft your account through ATM withdrawal, debit card transaction, write a check or a bill that is automatically deducted from your account.
To avoid overdraft fees, make sure you keep track of the money that you deposit and withdraw from your account. You can do so monitoring your balance through online banking. You should always have extra money in your bank account if you have a habit of overdrafting your account.
You can also link the checking to your savings account so that the money from your savings account will be used to cover the amount when there is insufficient funds in your checking account. It is important to always read all your bank letters as the letter could be telling you that you are charged with an overdraft fee for a recent transaction that has exceeded your overdraft account.
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