What is an overdraft fee and how does it work?

Posted on Feb. 22 2022 By: Oneblinc 5 min. read

We all know life is unpredictable and it is very difficult to keep our finances in order and totally organized. For most people, it is very common to use their overdraft funds to complete the total money of their bills. But what is an overdraft fee and how does it work? This post will cover all about it!

Overdraft funds are a very useful tool in helping us with paying our bills in those months which we lose control of our budget. Maybe it is a common practice to you and, exactly for this reason, you have to be well-informed about it. In this post, we’ll teach all you need to know about what is an overdraft fee.

What is overdraft fee

Overdraft fees occur when a payment order is carried out but there are not enough funds in your bank account to cover the full transaction. Thus, instead of canceling the payment, the bank lends you the rest of the money and charges you a fee.

Overdrafts can be used multiple times in one day, but you get charged with multiple fees. Most banks also impose a limit on the total funds available to you as overdraft. So, don’t rely on your overdraft funds to pay for your bills before knowing very well the total funds available.

After you have used your overdraft funds, in order to rectify them you have to add enough money to your bank account in order to cover the overdraft amount and all the fees charged by the bank. 

In general, overdrafts are automatically discounted from your checking  account after a new deposit. So, it is very important to know exactly how much the overdraft fee is in order to avoid unpleasant surprises. 

How to use overdraft funds

As you’ve seen, overdrafts are a special kind of instant loan where the bank hands over some money in order to help you with a payment. Overdrafts do not require credit score check or anything similar. However, you should be cautious with all fees you pay by using it.

You can even think of overdrafts as a kind of loan for bad credit. Due to its instant approval, overdraft fees are usually much higher than other types of loans. Thus, if you’re constantly using overdraft funds, you should check all the fees you’re paying. These are the fees charged by some well-known lenders of the market:

  • US Bank: $36;
  • Wells Fargo: $35;
  • Bank of America: $10;
  • Capital One: $0;
  • Citi: $34.

Using your overdraft funds is usually very easy and requires no complications or bureaucracies. Most credit cards offer some overdraft limit for every user. In fact, it is very likely that you already used your overdraft funds without being aware of it.

calculator, pencil and paper with numbers.

A good advantage of overdraft fees is that they don’t affect your credit or credit score. The total limit of overdraft funds available for each client is way smaller than the total credit limit. Therefore, it is a much safer way of using credit in specific and really important situations.

Now that you have the answer to the question “what is overdraft fee?”, we’ll share some important tips to help you with using your overdraft funds in a cautious and well-prepared manner.

Tips before you use it

By now you already know the meaning of overdraft and especially how it works. To be well-informed is the first step to avoid financial slips. If you’re constantly using your overdraft funds, you should also consider the following tips:

  1. Get informed about all the costs with fees, especially if you use it multiple times;
  2. Make sure you resort to your overdraft only at special and really necessary occasions. Don’t make it a constant habit (always have in mind that the very use of overdraft funds means that your finances are getting out of control);
  3. Keep track of your spendings and always count the payment of the overdraft at your next deposit. If you keep everything noted, then you don’t increase the chance of being surprised when your deposit gets discounted;
  4. If your credit company is charging you with a high overdraft fee, then you should consider shifting to another credit company with better fees; 
  5. Even if the fees do not hurt your budget, this is still not a good reason to be resorting to overdraft funds. Assume you pay a $30 dollar fee every month due to overdraft, during the course of one year you’re going to spend $360,00. All this money could’ve been saved if you were a little more organized.

OneBlinc to change your financial life!

We’ve talked about what is overdraft fee and what kind of information one should look for before resorting to this financial aid. Always have in mind that organization is the key feature of a healthy financial life. In finances, there are no absolute rules about what is right or wrong, but you must always be organized!

If you need help with organizing your finances and putting your life back on track, OneBlinc is the right option for you! OneBlinc is a personal lender that offers fair and competitive rates for all kinds of employees. At OneBlinc you’ll find a team of experts to help you with making the best financial decisions!

About us

Unexpected things happen more often than we would like them to. That’s why OneBlinc is here to help, whether you have an emergency or just need that extra cash to go through the end of the month. We believe in people, and we understand that everyone might need money someday, somehow.