How Does Overdraft Protection Work? Here’s Why Your Available Balance Is Higher Than Your Bank Account

At some point in their lives, most people will have experienced the confusion of opening your bank account only to see that your available balance is higher than the amount of money you actually have in your bank account. This can be a really confusing moment, and you might expect that there is a glitch with your account. 

But there really isn’t anything to worry about. In fact, it is perfectly normal for your bank account to have a lower value than your available balance. That is if you have an overdraft, of course. 

An overdraft allows you to access more money than you actually have in your bank account. This is why your available balance may show as higher than your bank balance. In this guide, we’ll be explaining more about how this works.

So if you want to find out more about overdraft protection, keep on reading! 

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What is an Overdraft Limit/Protection?

First things first, what is an overdraft limit or overdraft protection? Well, an overdraft is essentially a loan from your bank. When you open an account with a bank, many banks will offer the option to add an overdraft. This overdraft essentially acts as a buffer, and it can be a real lifesaver if there is ever an issue with incoming payments to your account. 

When the bank offers you the overdraft limit, it will come with terms and conditions. The amount that you are allowed to borrow in the form of an overdraft will sometimes be a standard, fixed amount for all customers that have accounts with that bank. Other times, the overdraft limit will be set based on your credit history. 

If you go into your overdraft, then you will need to repay the money that you owe to the bank/lender. Sometimes, the overdraft will be interest fee, meaning that you can enter the overdraft and simply repay the money without needing to pay interest on top. Other overdrafts will require you to pay interest on all repayments, and others will require you to pay interest if the account was left in its overdraft for a set period. It all depends on your own specific overdraft limit. 

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Why is My Available Balance Higher Than My Bank Account?

So, if you pop your card into the ATM and find that your available balance is higher than your bank account balance, you may get confused. But there is no need to worry because this is simply due to the overdraft on your account. It is common for your bank account balance to fluctuate as payments go in and out, but don’t worry if you notice that your available balance is higher than your account balance. 

Your bank account balance is the money that you physically own and have in your bank account. Whereas the available balance is the balance that you can actually use. When companies put a hold on funds in your account. So if you have ordered something online, it is common for that amount to be deducted from your available balance, long before it is deducted from your actual balance. 

Essentially, your overdraft is the opposite of this. When you have an overdraft, your available balance will show as higher than the money you actually own. That is because your overdraft will be reflected in the available balance. This is why it is very important to monitor your finances if you have an overdraft, in order to know when you stop spending your own money and start spending the bank’s. 

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Should You Add Overdraft Protection to a New Bank Account?

If you haven’t already got overdraft protection on your bank account, you might find yourself questioning if this is the right option for you. Overdrafts are often offered by banks in an “upselling” fashion, and that is because the interest that you pay on money that you use from your overdraft will go to the bank. So, before you say yes to overdraft protection, you should ask if this is a good idea. 

A lot of people believe that overdraft protection is a good thing to have. In situations where money that you expected to enter your account doesn’t arrive, overdraft protection can be a massive live saver. However, ultimately it can end up being a very expensive convenience. 

If your overdraft protection comes with high fees and interest, then the act of borrowing this money often isn’t worth it. A huge amount of the money that the bank is allowing you to borrow is actually made up of this interest and fees, which is why it isn’t worth it. This can really impact people when they start to view their overdraft as free money. 

However, as long as you don’t view your overdraft as free money, you will often find that an overdraft can be a good addition to your bank account. As long as you only use it when you need it.

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Things to Consider Before Taking Out Overdraft Protection

Finally, let’s wrap this up by taking a look at some of the things that you really need to consider before taking out overdraft protection.

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The Warning No One Gives You

We have already touched on the high interest rates and fees often attached to overdraft protection, but this is something that very few people talk about. Before you accept overdraft protection, you should consider these fees to see if it will end up costing you more money than helping you. 

How You Use It

How you use your overdraft is definitely something else to consider. Your overdraft should be seen as a small amount of money to help you in your time of need. It shouldn’t be viewed as free money, and as long as you view it as protection rather than credit, you shouldn’t encounter any issues. 

Summary

In short, overdraft protection is essentially a small pre-agreed amount of money that the bank that you have your account with will lend you should you exceed your bank account balance. This is why it can cause your available balance to be higher than your actual bank balance. 

Your pay stubs will be a great resource to find out figures needed to calculate net income etc.

Thank you for reading!