Overdraft vs Clean Overdraft: What’s the Difference?
Most of us have become familiar with the term overdraft via the overdraft protection that most financial institutions offer. Through this protection, individuals can withdraw money from accounts, despite having insufficient funds, without experiencing a “bounced payment.” Although individuals may overdraft for a variety of reasons, intentional or not, they may experience one of two kinds of overdraft.
A simple overdraft implies that there is some security involved on the side of the institution providing the funds — usually in the form of overdraft protection. In the case of an overdraft on a checking account, the financial institution will front the money to cover the consumer’s insufficient funds, but they might issue security in the form of an additional fee or penalty to the consumer. In addition, the institution might have a policy in place wherein an overdrafted account is closed if it isn’t returned to good standing within a certain period of time.
Clean overdrafts, on the other hand, imply that there is no security involved. Much like unsecured loans, the financial institution involved relies on the personal financial security of the consumer.
How can overdrafts affect my financial standing and credit score?
Overdrafting your account can happen to anyone, but to make sure that your account stays in good standing, it’s important to act quickly. Every financial institution is different, but in order to maintain your account in good standing following an overdraft, you might be required to deposit enough into your account to return it to a positive balance at least once in the subsequent 30-day period. If you do not, it could result in additional fines, closed accounts and calls from collections agencies.