What is an overdraft?

What is an overdraft? 

A Bank or any other financial institution gives a facility to customers to borrow some amount of money from their account. The Overdraft is nothing but a Credit given by the banks to the account holders when their account balance becomes zero or insufficient funds to cover a withdrawal or transaction. 

Overdraft Meaning

An overdraft means it occurs when excess funds are withdrawn from the current account of the customer. In that case, banks are giving a loan to the customers to withdraw some amount from the bank, the current account is said to be “overdrawn”.

What is an overdraft account?

           An Overdraft account or OD account given by the banks helps the customer to repay all the payments in case of checks bounce and check returns, or rejection of checks. 

Customers who are having overdraft accounts can take loans on them. They can pay lower interest on the loans. Interest rates are very when compared to credit card interest rates. Overdraft is a better option in necessity. 

Contemplation on Overdrafts 

             An overdraft can be covered by a bank’s use of its funds; it will not reflect on the credit score of the account. When the credit card is linked to an overdraft account, then there is a chance credit score will be affected, in that case, our debit should increase to that point. However, there is no problem with an overdraft account. 

The customer should repay his overdraft in a specific time, in case there is any delay or failure from the customer side banks would hand over their overdraft account to collection agencies, and those collection agents have been reported to Credit Agencies like Equifax, Experian, and TransUnion. 

Overdraft Protection 

    Overdraft protection is a very good tool for a customer to prevent a mortifying deficiency that throwback the customer's ability to pay. Over Draft, accounts are usually linked to the savings account, and other checking accounts. Ensure that there is no shortfall of funds, no check returns or transfers declined, and also avoid charges on non-sufficient funds. Overdraft protection fees on the dollar amount differ by account and by the bank. 

Customers should keep one thing in mind, they should not use overdraft protection excessively, usage of overdraft protection should be according to their needs, if it is more banks can remove the account. Banks are not providing any free service to maintain our overdraft account; they are collecting fees on it. 

Conclusion 

  • An overdraft happens once the associate account lacks the funds to hide a withdrawal, however, the bank permits the group action to travel through anyway.  

  • The draft permits the client to continue paying bills even once there's shy cash. 

  • An overdraft is like every alternative loan: The account holder pays interest thereon and can usually be charged a one-time shy funds fee. 

  • Overdraft protection is provided by some banks to customers once their account reaches zero; it avoids shy funds charges, however, typically includes interest and alternative fees.