An overdraft occurs when you make a payment or withdrawal from your bank account, but the account balance is insufficient to cover the transaction. In this situation, the bank may extend a short-term loan to cover the payment, but they charge fees for this service, which can be relatively high. Additionally, they apply interest on the amount you go overdrawn, making overdrafts potentially expensive. Overdraft fees typically range from $40 to $50 per occurrence, and multiple fees can be charged in a single day.
Overdraft protection is a service offered by most banks in Canada to help individuals manage the costs associated with overdrafts. It is an additional product that you pay for, and its primary purpose is to make overdrafts more affordable and manageable. With overdraft protection, you can go overdrawn to avoid having your transactions declined, while also avoiding the costly non-sufficient-fund (NSF) fees.
Some banks charge a fee for overdraft protection only if you exceed a certain threshold, typically around $50. They might also provide a grace period during which you can repay the overdrawn amount without incurring fees.
Generally, there is no specific credit score requirement for overdraft protection unless you’re using a credit card or a line of credit to cover overdrafts. However, a poor credit score might affect your ability to secure an overdraft since it implies a degree of financial unreliability. In Canada, a credit score below 560 is considered poor.
Applying for overdraft protection is usually straightforward. Most banks allow you to apply online through their online banking platforms. You can sign in to your account and look for the option to apply for overdraft protection, or you can contact your bank directly for assistance.
