Overdraft line of credit.

In plain English

An overdraft line of credit is a small loan tied to your checking account that covers a payment when your balance is short, instead of the bank declining it or charging an overdraft fee. When you spend more than you have, the bank advances the difference from this credit line, and you pay it back plus interest on the borrowed amount. It is one form of overdraft protection, and it usually costs less than a stack of per-item overdraft fees because you pay interest only on what you borrowed. You apply for it like other credit, so approval depends on your credit profile.

01Why it matters

If overdrafts happen to you, a line of credit can turn a per-item fee pileup into a few cents of interest, which protects your balance when money is tight.

02The math, step by step

Your account has $40 and a $90 bill clears. With an overdraft line of credit, the bank advances the missing $50 and charges interest on that $50 until you repay it, often just pennies over a few days. Without it, the bank might pay the bill and charge a flat overdraft fee, or decline it and charge a returned-item fee. The exact fee and interest rate are set by your bank.

03What this is NOT

04Receipts

Every figure on this page is sourced to a primary document. Tap to open the original.