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Financial literacy: What is an overdraft?

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Piece of paper saying overdraft

If you have access to an overdraft, you may be at risk of paying more than you can afford. While an overdraft may seem like the answer to make a quick payment before payday, you should avoid overdrawing your account whenever possible, due to the fees and financial risk it can introduce.

What is an overdraft?

An overdraft is what you incur when your account is put into negative balance due. This happens when you make a transaction that costs more than the available funds in your account. If you don’t have enough money in your account to cover the transaction, your bank will pay it on your behalf until you can repay them.

In some cases, banks may charge you a fee when you make a transaction that puts you into your overdraft. Typically, you won’t be charged for spending anything under $5, but this can vary depending on which bank you’re with.

What happens if I can’t pay my overdraft?

Because of fees, overdrawing your account by a few dollars can mean you eventually have to pay even more than you initially borrowed.

If you are unable to repay the amount you are overdrawn by and the additional fees, the bank may formally close your account and attempt to collect the due funds. If no payment is made, your account will be reported to a consumer reporting agency. This can have a negative impact on your financial future, making it difficult for you to open an account with a different bank.

How can I avoid an overdraft?

The best way to avoid an overdraft is by managing your account in a way that ensures your funds don’t drop below $0. Keep on top of your finances by regularly tracking your account records and how much you’re spending.

It helps to keep a personal note of how much you spend on debit cards, withdraw from ATMs and what checks you write. If you use online banking, you can regularly review your account statements, and even set up account alerts to notify you when your account becomes low.

Do Prepaid Cards have an overdraft?

There are Prepaid Card options that come with an overdraft. However, this isn’t the case with your Kroger Reloadable Prepaid Debit Card.

While your Prepaid Card works in the same way as a standard debit or credit card, there is a capped spending amount. Choose the amount you wish to add to your Prepaid Card, which you can spend just like a regular card.

Once that amount runs out, you can’t spend anything else until you reload it. This means you can’t be overdrawn and don’t have to pay any additional fees like you would with an overdraft.

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