Checking Line of Credit: What Is It and Do You Need One?

Bank fees come in various forms, from ATM fees to transfer fees to monthly maintenance fees and many more. But perhaps the most annoying, and costly, are overdraft and non-sufficient fund fees. These are fees a bank charges you for when your spending exceeds the available balance in your checking account. If you spend more money than there is in your checking account and you don’t have overdraft protection, then your transaction will likely get denied and you’ll get hit for a non-sufficient funds fee. If your account does allow purchases to be made with insufficient funds, then your bank will likely hit you with an overdraft fee after allowing the transaction to go through. Either way, these fees are not cheap and can add up very quickly. Fortunately, there are alternative solutions to avoid these kinds of charges, even if your checking account falls below zero. Read on to find out what a checking line of credit is and whether it makes sense for you.

What Is a Checking Line of Credit?

A checking line of credit is often called an overdraft line of credit. Basically, it is a type of loan attached to your checking account that can cover expenses that may exceed your account balance. With a checking line of credit, if you run out of money, the line of credit can cover the costs so you avoid bouncing checks, missing payments, having your debit card denied and overdrafting in general. Depending on your bank or credit union, you may be able to access the line of credit in case of emergency when you need cash.

One of the principal reasons customers opt for a checking line of credit is to protect against overdrafts. Of course, many banks offer overdraft protection programs. The main appeal, however, is that checking lines of credit are often cheaper than standard overdraft protection programs or having no protection at all.

Also: 4 Signs It’s Time to Get a Business Line of Credit

How a Checking Line of Credit Works

A checking or overdraft line of credit is a line of credit extended to you that’s connected to your checking account. Like any loan or line of credit, it comes with an interest rate, and when you pay back the principal and interest pulled from the credit line, the amount of credit replenishes. And checking lines of credit don’t need to be used solely for overdraft purposes. In many cases, you can take advantage of a checking line of credit for emergency and specialty purchases, using your checking account funds plus up to the credit limit you’ve been approved for.

A good way to show how a checking line of credit works is to compare it to overdraft options. For example, if you have no money in your checking account and a few purchases or payments go through worth $1, $5 and $10, respectively. Your checking account would be at -$16, but that’s before the overdraft fees kick in. Considering the average overdraft fee is $35 per transaction, you’d get hit with $105 in overdraft fees, to bring your balance down to -$121 — a rather costly result for a mere $16 overdraft.

On the other hand, with a checking line of credit, your checking account would borrow the $16 against the overdraft line of credit. You’ll get charged interest on the loan, the interest rate of which varies from bank to bank, but is similar to credit card rates. Even if your bank charges a fee for transferring money from the credit line to your checking account, paying that plus interest on just $16 is much cheaper than $105 in overdraft fees.

Checking Line of Credit vs. Overdraft Protection

With overdraft protection programs, checks and other debit transactions can clear even if your account lacks sufficient funds. Thus, you won’t get denied the transaction, but the bank passes on the cost of this service by charging you overdraft fees. However, with overdraft protection, the bank pulls money from a linked account, such as a savings account, to cover a transaction if there isn’t enough in your checking account and charges you overdraft protection fee is charged for this transfer. With standard overdraft service, on the other hand, you’ll be allowed to make transactions even if you don’t have enough money, but you’ll be charged an overdraft fee per item. When you have neither overdraft protection nor overdraft service, then typically the bank denies the transaction and you get charged a non-sufficient funds (NSF) fee.

Overdraft and non-sufficient funds fees usually average about $35 for each transaction, whether it’s authorized to go through or is denied and becomes a returned item. If you have overdraft protection, the transfer fee from your other accounts to cover your checking transaction varies from institution to institution, but generally is less than an overdraft or non-sufficient funds fee. A checking line of credit, since it is a type of loan, charges you interest, but it very often can be less than continual overdraft fees or overdraft protection fees.

Pros and Cons of a Checking Line of Credit

As is typical with most financial products, there are pros and cons involved with checking lines of credit. Though policies can vary from one financial institution to another, it general, the advantages of a checking line of credit tend to outweigh the negatives.

Read: Business Line of Credit vs. Loan — Which Is Right for You?

Advantages of a Checking Line of Credit

The biggest advantage is avoiding non-sufficient funds and overdraft fees. These types of fees are usually charged on a per transaction basis, which means even for purchases that cost only a few bucks will be charged $35 in fees for each purchase, on average. Thus, you could have 10 charges of only $2 each, but that could potentially equate to $350 in overdraft fees depending on the bank’s discretion. If you don’t have any overdraft protection at all, then instead of an overdraft fee, you’ll get hit with a comparable non-sufficient funds fee and the transaction could get denied. A checking line of credit eliminates all these fees and pain points.

Another advantage with a checking line of credit is that you can use it strategically to cover purchases you know your checking account can’t cover. Depending on your bank or institution, you might be able to write a check for an amount right up to your credit limit for your checking line of credit. This makes it great for having access to extra money if an emergency arises.

Learn: Which Credit Cards Help Build Business Credit?

Drawbacks of a Checking Line of Credit

One of the best features of a checking line of credit is that it usually is less expensive than standard overdraft protection, as well as allowing you to keep spending in emergencies. However, at the end of the day, it is a loan and depending too much on this form of credit can produce its own issues.

Checking lines of credit, though inexpensive, are not free. The main thing to keep your eye on are interest charges. Like with a credit card, interest charges can add up. Fortunately, if you only borrow funds from your checking line of credit just one or two days, the cost should be very low, especially in contrast to non-sufficient funds or overdraft fees. Other fees associated with this line of credit include transfer fees, which are small and occur every time you move funds from your credit line to your checking account. Annual fees for this service are often charged, though many banks do not. In the end, these fees are still less of a headache than getting hit with multiple overdraft fees.

The last drawback is more related to your behavior. If you have a checking line of credit attached to your checking account, it is not that different from having a credit card. Similarly, just like a credit card may encourage you to spend money you don’t really have, a checking line of credit may do the same. The inclination to overspend could be made worse if you receive a checking line of credit with a markedly high credit limit, such as $10,000, which many banks offer. Therefore, you need to approach a checking line of credit like a credit card: Repay the money you borrowed as quickly as you can and keep your credit balance low or zero.

See: Are Credit Union Credit Cards Any Good?

The Bottom Line: Getting a Checking Line of Credit

Getting a checking line of credit is fairly straightforward. To sign up for a checking line of credit, just contact your bank and see if the service is available. Since it is a form of a loan, some banks may require you to fill out an application, though not everyone will charge you application fees for a checking line of credit. If you do need to apply, the main stipulations are usually that your account be in good standing, you not have any outstanding account restrictions, you can’t be past due on any other loan product from your bank and have an active account.

As with any financial product, make sure to ask about any associated fees for the service. You may want to ask for some alternative services to compare them yourself. Since this credit product is designed for overdrafts and emergencies, try to use it as rarely as possible so that you keep your checking line of credit balance at a manageable amount and, therefore, your interest charges and transfer fees low as well. Whether it’s for business purposes or personal use, if you act responsibly with your spending, a checking line of credit can be a useful resource.

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