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Overdraft protection
is a banking service consumers can opt into to overdraw their chequing accounts
for a fee. For instance, if your account only has $10 in it and you forgot
about your upcoming $15 Netflix subscription, your payment will still go
through because 1) your bank can loan you $5, or 2) you have a backup account
linked. Your bank will charge you an overdraft fee either way, and Bankrate
reports that the average fee is $33.47.
“Can I overdraft my
debit card?” you ask yourself. “What about my credit card? Or my savings?” You
know it’s possible to overdraw your account with online payments, and you’ve
heard of people doing it with cheques, so it’s understandable to wonder what
other kinds of accounts allow you to make transactions without sufficient
funds. If we’re going to use the term “overdraft” as a verb, let’s dive into
the possibilities.
Can You Overdraft a Debit Card?
Yes, you absolutely
can overdraft a debit card.
Let’s say you had $5
in your account this morning, but today is payday, so you should have plenty of
money by the afternoon. Unfortunately, your employer’s payroll system takes
longer to deposit your paycheck, so you won’t have the funds you expect some
time until the next business day. You use your debit card to buy a $7 slushie from
the convenience store without knowing your real balance. The transaction goes
through because you have overdraft protection, but now you owe the bank
$35.47 — $2 for what it loaned you and $33.47 for the service.
You can call the bank
and try to explain, but you just purchased a really expensive slushie if they
decide not to waive the fee. It was such a small difference, too, but overdraft
fees are fixed. Your debit card is connected to your chequing account, so debit
card overdrafts are a common way to incur such fees.
In addition, banks
will often set overdraft limits. Even if you have overdraft protection, this
means you cannot borrow more than your bank will allow if you overdraw your
account (such as $500 or $1,000).
Can You Overdraft a Credit Card?
No, a credit card
overdraft is not a thing — at least, not exactly. Because using your credit
card entails borrowing money from your credit issuer, there is technically no
finite amount of money in an account to withdraw from.
However, it is
possible to reach and exceed your credit
limit. Your credit limit is the maximum amount of money your issuer is
willing to let you borrow. This number varies between different cards,
institutions, and individuals, so it could be as little as $200 (such as
putting down a deposit on a secured card) or as much as $500,000. Your card
will decline if you attempt to make a purchase that pushes you over your credit
limit.
Unless you have
over-limit coverage, that is. Similar to overdraft protection, over-limit
coverage is a service you must opt into with your credit issuer that enables
you to exceed your credit limit in exchange for a fee. Your bank cannot charge
you fees for reaching your limit, only if you agree to surpass it.
Keep in mind, though,
that using too much of your available credit could negatively impact your credit score. Experts suggest using
approximately 30% of your credit limit. For instance, if you have $15,000 in
available credit, then making more than $4,500 worth in purchases or expenses
could make you seem like a risky borrower.
Can You Overdraft a Savings
Account?
Fortunately, a
savings account can only be emptied, not overdrafted. That said, different
rules influence your ability to withdraw from your savings.
US law dictates that you cannot make more than six convenient
withdrawals from your savings account per month (“convenient” includes
transfers made via phone, online, cheque, etc.). Your bank may charge you a fee
if you exceed this number of withdrawals or refuse the transaction. However,
it’s possible to exceed the six-withdrawal limit if you use “inconvenient”
methods, such as visiting a bank branch in person, taking out cash from an ATM,
or requesting a cheque.
How Can You Avoid Overdraft Fees?
Though you cannot
overdraft savings accounts or credit cards, it’s beneficial to be careful with
your checking account, so you avoid overdraft fees. A few ways you can elude overdraft fees include:
● Opting out of overdraft
protection;
● Enabling low-balance alerts, so
you know when you are at risk of overdrawing your account;
● Linking your checking account to
your savings as a backup.
You can also use
financial apps to manage your various accounts and keep a watchful eye on your
financial situation. If you have a low balance with no choice but to pay a
necessary expense, then Earnin allows you to access up to $100 per day from your
paycheck before the typically scheduled date without taking out a loan.
Likewise, Mint is helpful for budgeting, and Peak can help you visualize your
financial goals.
You’re not alone if
you’re worried about overdrafting, but rest assured, you cannot overdraft a
credit card or savings account.
This article originally appeared on Earnin.
Please note, the
material collected in this blog is for informational purposes only and is not
intended to be relied upon as or construed as advice regarding any specific
circumstances. Nor is it an endorsement of any organization or Services.
