What Is a Linked Transfer Account?

A linked transfer account is when accounts held by an individual at a financial institution are connected to each other in order to enable the transfer of funds to and from each other. The most common linked transfer accounts are from savings accounts to checking accounts or credit card accounts. The purpose of using linked transfer accounts is to avoid interest charges or penalties on overdrafts by using the funds parked in a savings account.

Understanding Linked Transfer Account

For example, say you have a checking account with a balance of $1,500 for your monthly expenses, a credit card with a credit limit of $2,000, and a savings account that pays you annual interest of 2% and has a balance of $10,000. The interest rate for the overdraft facility on the checking account is 7%; exceeding the limit on your credit card would result in a $50 penalty plus interest at 20%.

You set up linked transfers that would automatically (a) transfer funds from your savings account to your checking account if it is overdrawn, and (b) transfer funds from your savings account to your credit card account to pay off the card balance at month-end or if you exceed the credit limit prior to month-end.

Assume you have heavy expenses for holiday shopping in December and spend $2,500 from your checking account and charge $3,000 to your credit card. Fortunately, your foresight in setting up the linked transfer accounts would save you a bundle.

If you did not have the linked transfer accounts in place, the overdraft on the checking account would cost you $5.83 in monthly interest (i.e. {$1,000 x 7%} / 12), while exceeding the limit on your credit card would cost you $50 + $50 in monthly interest (interest assumed on the full $3,000 card balance), for a total of $105.83.

But by using the linked transfers from your savings account, you avoid the $5.83 interest on the checking account overdraft, plus the $100 penalty and interest on the card balance. Paying off the card balance of $3,000 in full, plus transferring $1,000 to the checking account, would deplete the savings account by $4,000, resulting in the lost interest of $6.67. But that is a small price to pay, compared to the $105.83 it would cost if your accounts were not linked.

Overdraft Protection

Normally, an overdraft occurs when an account holder withdraws more than he has from his checking account. When this happens, the individual or business is charged an NSF fee (Non-sufficient Funds) or overdraft fee, which averages $35 per transaction. In addition, he may be charged an overdraft fee of, say $30, for approving a debit transaction that exceeds his available funds.

An account holder who wishes to protect himself in the event that he runs short of funds at some time in the future may opt for overdraft protection. Overdraft protection is, in effect, a loan that can be automatically drawn upon if an account has insufficient funds.