What is overdraft protection?
Overdraft protection, quite simply, keeps you from overdrawing your account and prevents fees and bounced checks. There are a couple of different ways you can do this, depending on your bank. The most common are transfers and overdraft lines of credit.

Transfers
If you have a savings account from the same bank as your checking, many banks will allow you a set number of times per month you can draw from your savings to cover your checking account. For example, if you wrote a check for $50 and only had $40 in your account, the bank would automatically pull the remaining $10 from your savings.

One thing to keep in mind, however, there is usually a limit on the number of times you can do this. After that, your account begins to go in the negative and you start to accrue fees.

Overdraft line of credit
An overdraft line of credit is a loan that is connected to your checking account. When you have this line of credit, you can use more funds in your checking account even if you don't have them in your account at that moment. You can write checks or use your debit card for amounts that are higher than your checking balance without fear of penalties.

For example, let's say you have $10 in your checking account but you have two charges hit your account at the same time-one is a check for $10, the other is a $5 debit purchase, putting you $5 in the hole. Not only that, but let's say your bank charges you $20 for each overdraft-you now have $40 in fees to cover $15 worth of charges.

With an overdraft line of credit however, you would end up borrowing $5 on your line of credit to cover the amount of money your checking account was short. While you are charged interest on the amount you borrow, it's a very small price to pay when compared to the fees you would have otherwise been charged.

Things to keep in mind
An overdraft checking line of credit is not a free service provided by your bank; rather, there are a number of things you need to keep in mind if you are considering using this service:

• You have to apply and qualify for it. Obtaining this type of line of credit is similar to applying for a credit card. They will run your credit and you have to qualify for it. You will also have a credit limit on your overdraft line of credit.


• There is an interest rate. You will pay interest on the money that you borrow to cover the negatives in your checking account. This is typically around 20%, sometimes more.


• There are fees. Many banks will also charge an additional fee on top of the interest, like 5% of the outstanding balance of your line of credit loan, if you do not pay it off each month.

These are some of the best ways to protect yourself from overdrawing your account.