We have all been there. Money is tight and we play games with our bank account balances by trying to float a check and get money into the account before the check is presented at the bank.
When the timing is off, the bank account goes into overdraft status, usually putting the person into an even tighter financial crunch.
So what is the difference between overdraft and debt?
The situation described above is pretty typical of how someone overdrafts their bank account.
Consumers can protect themselves from severe penalties with overdraft protection, but there is still generally some type of charge for this type of protection.
If they do not have overdraft insurance, the fees can really add up.
There are two different types of overdraft protection. Some banks will charge a monthly fee for the service or a fee when the service is actually used. For instance, there may be a £2 monthly fee for the service and then a £15 fee if the service is activated.
Another possibility is to have the checking account tied into a savings account as protection. When the checking account is in overdraft, the bank charges a small fee to transfer the money from savings to checking in order to cover the debt.[doyouneed01]
If there is no insurance on the account, the bank may cover the check and put the account into a negative balance. When this happens, you will have to either pay off the balance immediately, plus the fee, or risk having the account closed.
These fees are usually fairly substantial and you are in essence creating even more debt by doing this.
Traditionally, debt is used a term where someone knowingly borrows money from a bank or runs up credit card charges. They pay off a predetermined amount of money over a specific period of time. Of course, credit card payments would vary depending upon how much of the limit is actually used at any given time.
While overdraft is definitely creating debt, it is a very foolish decision to make financially. Even the worst credit card and loan rates are miniscule compared to overdraft charges and the period in which the debt is expected to be paid back.
You are better served to closely monitor your finances and take measures to protect yourself from ever putting your account into overdraft status.