A cash reserve credit protects your checking account against overdrafts. If a check comes in and your account balance is too low, the bank will automatically transfer money from your cash reserve. You may also be able to borrow from the reserve like a line of credit. Like most forms of credit, you'll pay for the privilege of having a cash reserve, and it's easy to wind up owing more than is healthy for your finances.
Qualifying for Cash Reserve
Applying for a cash reserve credit line works much like any other loan application. The bank wants to know your name, address, your job, where your money comes from and how much you have. It may ask for tax returns or financial statements to prove you have the money you claim to. If you apply with a co-applicant such as a partner or spouse, he'll need to provide the same information.
What Borrowing Costs
Covering your checks avoids overdraft fees, but it's not free. If you borrow from Key Bank's cash reserve credit line, for instance, you are charged interest that's 11.99 percent above the prime rate in the "Wall Street Journal," to a maximum 25 percent. You pay $30 for Key's overdraft protection and $10 for each day the bank advances money to your checking account. The maximum advance fee is $100 a billing cycle. U.S. Bank says it has no annual fee for its cash reserve, and it charges a 21.9 percent interest rate.
Some banks offer the same service to businesses. If you own a small business, you can set up a line of credit for emergency funds and also put it into play if you overdraw your business account writing checks. As with a personal account, you'll have to apply and qualify, possibly proving you have collateral to cover any borrowing you make. Otherwise, the accounts work like a personal cash reserve credit.
Weigh the Costs
If you're looking at a line of credit for yourself or your business, compare the costs and fees for a cash reserve credit line to the alternatives. Just because it's tied in with checking-overdraft protection doesn't make it a better deal than a lower-cost line of credit elsewhere. The fees at your bank may be lower than check overdraft fees, but if you can't pay the reserve back promptly, the interest will add up.