Overdraft Line of Credit

Under normal circumstances, you can't withdraw more than what you have in your banking account, but if the bank so permits you can withdraw an amount in excess of what you have. This is what is called an overdraft line of credit. It's a kind of loan which is connected to your checking account. You can use it to fund your purchases instead of using checks which you know would bounce or using credit cards and then paying huge fees and interest. Instead you can borrow few bucks this way and pay the accompanied interest later on.

When you and the bank agrees for an overdraft protection plan, you mutually decide the maximum amount which you can use as an overdraft. If the amount you withdraw is within this agreed limit, then there is a nominal interest charged at an agreed rate. On the other hand, if you withdraw in excess of the agreed amount, the fees charged would be more and there can be a higher rate of interest.

Applying for an Overdraft Line of Credit
The application process is nothing different from applying for any other credit, be it a loan or a credit card. The first step you should follow is checking your credit score. You should check for any discrepancies and outdated information, as these may affect your chances of getting a better deal. Once you have checked your credit report and made the necessary changes, you can apply for a line of credit with your bank. You can either opt to apply for it online or go to the bank in person for this application. Whenever you open a banking account, you can opt to open an overdraft line of credit. However, if you don't do it, you can apply for it later as and when you need it.

Cost of Overdraft Line of Credit
Depending on the bank with whom you are applying for an overdraft lines of credit, you may or may not be charged an opening fee. Usually, you don't pay anything when you apply for such a line of credit and unless you use it. Whenever you opt to use your overdraft, you are charged some amount every day, which varies from one bank to the other. You have to pay interest on the amount you have borrowed.

Advantages of Getting an Overdraft Line of Credit
This line of credit acts as a protection against bounced check and fees associated with them. Moreover, whenever you need money you can always use your overdraft limit to pay for your utilities and necessities. In addition to that, such a line of credit is comparatively cheaper than other types of credit as the interest charged is less. Depending on the amount of money you have in your banking account, the amount you can borrow varies. Usually, you are allowed to borrow anywhere between US $100 to 1,000, but if, you have a good credit score you may be allowed a line of credit of US $5,000 or even more.

Pitfalls of Overdraft Line of Credit
Though this form of overdraft protection acts as a safety net, there are times when you may be tempted to overuse this line of credit. However, you need to make sure that you don't use it regularly. Using it constantly means that you must start managing your money immediately. Yes, you can pay your bills whenever you don't have money in your account, but remember that you are playing with potential danger which later on may become a habit.

Thus, you can use your overdrafts provided by the bank whenever you are in need of extra cash, but make sure that you don't overdo it as it may land you in trouble later on.