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Overdraft: What is it and how does it work?
Overdraft: What is it and how does it work?
Updated over a week ago

An overdraft occurs when you spend more money than is available in your account, leading your bank to cover the difference. This should be approached with caution as it typically incurs high fees or penalties. In contrast, secured credit cards limit your spending to the amount deposited in your Secured Deposit Account, ensuring you don’t spend beyond your means and avoid unnecessary debt and fees.

What is an overdraft?

Overdraft is a term frequently associated with checking accounts. If you write a check that surpasses the balance available in your account, it will typically be declined due to insufficient funds. However, if you have overdraft privileges, the bank will extend credit to cover the shortfall, enabling the check to be paid. This type of transaction usually incurs an overdraft fee.

The impact on your credit score

Exceeding your credit limit not only triggers fees but can also negatively impact your credit score can be greatly impacted by your credit utilization rate, which is the amount of credit you are currently using compared to your total available credit limit. For instance, if your credit limit is $100 and your balance is $30, your credit utilization rate is 30%. However, if you exceed your credit limit and use your full $100 or more, your utilization rate will be 100% or higher.

A high credit utilization rate can negatively affect your credit score, so it's important to maintain a low utilization rate, ideally below 30%, for good credit health. Therefore, it's wise to be cautious before exceeding your credit limit, as it could lead to a difficult debt cycle and harm your credit standing.

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