Overdraft
What Is an Overdraft?
An overdraft occurs when a bank account holder withdraws or spends more money than is available in their account. When this happens, the account balance becomes negative, meaning the account holder owes the bank the amount of the shortfall.
Banks may allow overdrafts as a temporary service, but they often charge fees or interest for the transaction.
Why It Matters
Overdrafts can lead to costly fees if not managed carefully. Many banks charge overdraft fees for each transaction that exceeds the available balance, which can quickly add up.
Understanding how overdrafts work helps consumers avoid unnecessary charges and maintain better control of their finances.
How Overdrafts Work
Overdrafts typically occur when:
- a debit card purchase exceeds the available balance
- a check is written for more than the account balance
- an automatic payment withdraws more than what is available
Banks may handle overdrafts in different ways:
- approve the transaction and charge an overdraft fee
- decline the transaction
- transfer money from a linked account if overdraft protection is enabled
Example
If a checking account has $50 available and a $75 purchase is made, the account may show a balance of –$25 plus an overdraft fee.
Overdraft vs Overdraft Protection
- An overdraft occurs when spending exceeds available funds.
- Overdraft protection is a service that helps cover the shortfall using linked accounts or credit.
FAQs About Overdraft
Do all banks allow overdrafts?
No. Some banks decline transactions that exceed the account balance.
How much are overdraft fees?
Fees vary by bank but often range from $25 to $35 per transaction.
Can overdrafts affect credit scores?
Usually not, unless the account goes into collections.
Related Terms
