A checking line of credit, also known as an overdraft line of credit, is a type of loan that is attached to your checking account. It essentially acts as a safety net, providing you with access to funds when your checking account balance is insufficient to cover a transaction.
A checking line of credit can help you out during a cash crunch and allow you to avoid hefty overdraft fees, missed payments, and the embarrassment and inconvenience of having your debit card denied. However, these accounts come with costs and risks of their own. Find out if opening a checking line of credit is worth it.
How a Checking Line of Credit Works
A checking line of credit is a type of revolving credit linked to your checking account. If your account balance falls below zero, the credit line automatically covers the shortfall up to your credit limit. This allows transactions to go through despite insufficient funds and avoids bouncing checks, missing automatic payments, or having your debit card denied.
A per-transfer fee may apply, but it may be much less than what you would otherwise be charged for overdrawing your account. You’ll also pay interest on the borrowed balance, which will begin accruing on the date of transfer and continue until you pay off the borrowed funds in full. Missing or late payments can negatively impact your credit, so (like any other forms of borrowing) it’s important to manage a checking line of credit responsibly.
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Key Features
Here’s a look at some of the features offered by a checking line of credit.
• Automatic overdraft protection: A checking line of credit can automatically cover overdrafts, preventing declined transactions and bounced checks.
• Credit limit: The amount you can borrow is predetermined by the lender and may range from $250 to $5,000, though it can be higher for those with excellent credit.
• Variable interest rates: Interest is charged only on the amount you borrow, and rates are usually variable, meaning they can change over time based on market conditions.
• Revolving credit: Similar to a credit card, you can borrow, repay, and borrow again up to your credit limit without reapplying.
• Fees: Some banks charge you a fee for each transfer from your checking line of credit or for each day that a transfer is made from your line of credit to your checking account. Some institutions may also charge a yearly maintenance fee.
Recommended: How Many Lines of Credit Should I have?
Requirements and Eligibility
Not everyone who has a checking account can open a line of credit. Depending on your bank, you may have to meet certain eligibility requirements. These may include:
Good Credit History
Lenders generally look for applicants with a strong credit history, indicating responsible credit management. A good credit score (typically 670 or higher) increases your chances of approval and may result in a higher credit limit and lower interest rates.
Income and Debt Levels
Lenders typically want to make sure that you have a stable income and manageable debt levels, demonstrating your ability to repay the borrowed amount. Banks can check your current debt levels by accessing your credit reports. You may need to provide proof of income, such as pay stubs or tax returns.
Existing Banking Relationship
You typically need to have a checking account in good standing with the bank that offers the protection line of credit. Some banks may also require that you’ve had the account open for a certain amount of time, or that you’ve made deposits within a specific time frame.
Pros of a Checking Line of Credit
Here’s a look at some of the benefits of having a checking account with an overdraft line of credit.
May Save Money
Overdraft lines of credit are often less expensive than standard overdraft protection programs, which can range from $25 to $35 for each overdraft that hits your account. This can be especially true if you wind up making multiple overdrafts in one day.
Offers Emergency Protection
An overdraft line of credit provides you with a safeguard in the event of a financial emergency. If necessary, you can cover essential expenses that would otherwise get declined from your checking account. Some banks also allow you to withdraw funds directly from your credit line to cover emergency expenses.
Only Pay Interest on What Your Borrow
Unlike a traditional loan, where you receive a lump sum amount up front and pay interest on the full amount starting when it’s disbursed, a credit line allows you to borrow funds as needed and only pay interest on the amount you end up borrowing.
Recommended: Dividend Checking Accounts Explained
Cons of a Checking Line of Credit
Checking lines of credit also come with a few pitfalls. Here are some to be aware of.
High Interest Rates
Interest rates on checking lines of credit can be higher than other forms of credit, such as personal loans or home equity lines of credit. Variable rates can also lead to unpredictable borrowing costs. On top of interest, you may pay transfer fees and account maintenance fees.
Borrowing Limits
An overdraft protection line of credit can help you out in a pinch, but it won’t cover a major unexpected expense. You can often only qualify for credit limits up to $1,000. If your approved line of credit is insufficient to cover a transaction, it likely will not go through.
Debt Cycle Risk
Having a line of credit attached to your checking account is similar to having a credit card — it allows you to spend money you don’t actually have. The ease of access to funds can lead to a cycle of borrowing and repayment that is difficult to break, potentially leading to long-term debt.
When to Consider a Checking Line of Credit
A checking line of credit can provide some peace of mind and be useful for getting through occasional gaps in cash flow. If you do opt for this type of coverage, however, it’s generally wise to use it as little as possible. Once you open the credit line, it’s a good idea to balance your checking account regularly and sign up for low-balance alerts so that you know when you’re running low on funds. This can help keep your overdraft loan at a manageable amount and your interest charges and transfer fees low.
Alternatives to Consider
If a checking line of credit doesn’t seem like the right fit, here are some other options to consider.
• Emergency savings account: Building a savings account for emergencies can provide a financial cushion without the cost of interest or fees.
• Linking to another account: Your bank might allow you to link your checking account to a savings account or another checking account for automatic transfers in case of an overdraft. This way, you’re just using your own money to cover transactions instead of the bank’s.
• Personal loan: For larger, planned expenses, a personal loan may offer lower interest rates and fixed repayment terms.
• Switching banks: If you feel that the overdraft fees (and possibly other fees) at your bank are exorbitant, it can be worth shopping around for checking accounts that charge lower fees.
The Takeaway
A checking line of credit can be a valuable tool for managing your finances, offering convenient access to funds, protection against overdrafts, and the flexibility of revolving credit. That said, it’s important to understand the costs and potential risks associated with this type of credit. Alternatives to checking credit lines include using a linked savings account to cover overdrafts, building an emergency fund, getting a lower-interest loan, and switching to a bank that charges less in fees for standard overdraft protection.
Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.
FAQ
How much can I borrow with a checking line of credit?
The amount you can borrow with a checking line of credit is usually up to $500 to $1,000. Some banks may offer higher limits to customers with strong credit, higher incomes, and a long-standing relationship with the bank.
Does a checking line of credit require collateral?
No, a checking line of credit usually does not require collateral. It is an unsecured form of credit, meaning that it is not backed by any assets like a house or car. Instead, approval and credit limits are based primarily on your credit score and history of repaying past debts.
How do I apply for a checking line of credit?
Here are the steps typically involved in applying for a checking line of credit:
• Make sure you meet the bank’s requirements, such as having a checking account in good standing.
• Gather the necessary documents, which might include a photo ID and proof of income.
• Fill out and submit an application (you may be able to do this online, by phone, or by visiting a branch).
If approved, the checking line of credit will be linked to your checking account, ready for use as needed.
Photo credit: iStock/AleksandarNakic
SoFi members with direct deposit activity can earn 4.50% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.
As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.50% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.50% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 8/27/2024. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet.
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