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What is an Overdraft Limit?

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  • Written By: N. Madison
  • Edited By: Jenn Walker
  • Last Modified Date: 10 November 2016
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An overdraft limit is the highest amount of credit or money a person has available for overdrafts on a particular account. For example, a person can usually withdraw or make payments up to the amount of money he has available in his account. If a withdrawal or payment causes him to exceed this amount, this is referred to as an overdraft. When a bank allows a withdrawal or completes a payment for which the person does not have money available, it is extending credit to the account holder and usually places limits on the amount of credit it will extend. An individual may also have a separate account or a credit card to use for overdrafts, in which case he could designate his own overdraft limit.

An overdraft limit may be placed on an account by a financial institution or it may be self-imposed. For example, some banks automatically pay overdrafts for account holders in good standing and place limits on how much, and when, they will pay them. In other cases, however, a person may open an overdraft account with a bank for this purpose. Overdrafts are then taken from this account up to the limit on the account.

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Sometimes a person may use one of his other accounts to provide his own overdraft protection. For example, if a person has a checking account, he may use his savings account to provide overdraft protection. In some cases, a person may also use one of his credit cards as overdraft protection on his checking account. In such a case, he may decide the amount of overdraft protection he wants for his account instead of having the financial institution set the limit for him.

When a bank or other financial institution sets an overdraft limit, it may consider some of the same factors it might evaluate when deciding whether or not to extend credit or offer a loan. For example, a financial institution may check an account holder's credit history before extending overdraft credit. If a person has a low credit score, the bank may deny his request for overdraft credit, or it may offer the account holder a low overdraft limit.

Having an overdraft account, credit line, or other protection doesn't always help a person avoid all overdraft fees. If a person exceeds his limit, he may face fees despite the creation of an overdraft account or the granting of overdraft credit. As such, a person with overdraft protection may do well to continue to carefully monitor his account. This way, he can avoid accumulating so many overdrafts that he exceeds the limit.

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SarahGen
Post 3

@literally45-- The overdraft limit depends on the bank's policies. It's not the same for everyone and it may not even be the same at all times for the same customer.

There is absolutely a fee (or fees) associated with courtesy overdraft. Some banks allow a grace period for a certain number of days where they don't impose a fee, but they all do after that point. And the fees may apply every time an overdraft purchase is made, the fees may increase with each purchase and there may be a small fee placed on the account for each day that it remains in overdraft.

So do not be fooled into thinking that overdraft limits and courtesy overdrafts mean

free money or a credit without consequences. The overdraft limit can actually be a bad thing if the individual doesn't even know that he or she can withdraw more money than there is in the bank. And most people don't know what their overdraft limit and fees are either.
literally45
Post 2
How much is the overdraft limit usually? I realize it's not the same for everyone. It depends on their credit rating and history. But what is the average amount for a regular person with an average credit history?

And does courtesy overdraft have a fee or do banks overlook the overdraft because of the customer's good standing with the bank?

fify
Post 1

I didn't even know that there is an overdraft limit but I think that's great. Otherwise, people will continue to spend what they do not have and the fees will pile up. So an overdraft limit protects the consumer.

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