An overdraft account will cover debits, such as a check that is written on a checking account, should there be insufficient funds in the primary account. A bank can agree to open a line of credit for that particular purpose and set a credit limit for that line as well. Another option is for the account holder to open a savings account, fund it, and use that as the back up, or overdraft account.
Some banks do not impose fees when money in the overdraft account is used. Others will impose a charge for each transaction that uses funds from that account. In addition, some banks will allow account holders to transfer funds from their overdraft line of credit into their checking account to use as they please.
Overdraft accounts that are based on a line of credit usually have an interest rate associated with them. The account holder only has to pay interest on the funds that are in use and can pay off the balance to prevent more interest from accruing. They will receive a monthly statement as they would for any line of credit and that will show what is owed, the interest that has accrued for that period, as well as the minimum payment required. Even if you don’t anticipate running low on funds in your checking account, an overdraft credit is a good precautionary measure and, since there is no charge if the funds are not used, it is often recommended.