What is an overdraft fee and how does it relate to bad credit loans?

Writer and editor - Bryan Robinson | Updated on 2023-03-05

What is an overdraft fee and how does it relate to bad credit loan?

An overdraft fee is a charge that banks and credit unions charge for transactions that exceed the funds available in your account. Overdraft fees are also known as nonsufficient funds (NSF) fees.

If you bad credit loan that is a kind of line of credit, this can affect you. Some bad credit loans are like online credit cards, where you have an account that you can withdraw money from to your checking account. If so, an overdraft fee can occur.

Banks and credit unions can choose to allow transactions that would overdraw your account, but if they do, they can also charge you an overdraft fee. The overdraft fee can be a flat fee or a percentage of the transaction amount, and it can vary depending on the institution.

Overdraft fees are separate from any fees you may have to pay if you overdraw your account and don’t have enough money to cover the deficiency. Those fees are typically called returned item or bounced check fees.

If you are worried about incurring overdraft fees, you may want to consider signing up for an account with a bank or credit union that offers overdraft protection. With this service, the institution will either deny transactions that would cause an overdraft or transfer funds from another account, such as a savings account, to cover the shortfall.

How is an overdraft fee calculated?

An overdraft fee is usually a percentage of the amount of money you are overdrawn, up to a maximum amount. For example, your bank may charge you 5% of the amount you are overdrawn, up to a maximum of $50. This means if you are overdrawn by $100, your overdraft fee would be $5. But if you are overdrawn by $1,000, your overdraft fee would be $50.

How can I avoid paying an overdraft fee?

Some banks offer text or email alerts that let you know when your account balance goes below a certain level. This can be a helpful way of keeping on top of your finances and avoiding an overdraft fee.

What are the consequences of not paying an overdraft fee?

If you do not pay an overdraft fee, your account will be considered “dormant” and you will be charged a monthly service fee in many cases. This fee is in addition to any other fees you may have incurred on your account.

Bryan Robinson

Bryan Robinson
Writer and editor

Bryan Robinson is a finance writer with expertise in lending and their interest rates, fees, contracts and more.
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