What Is an Overdraft?
In plain English
An overdraft happens when a transaction exceeds your available checking account balance and the bank covers the difference, pushing your account into a negative balance. Banks typically charge an overdraft fee of $25 to $35 per occurrence. Overdraft protection programs and linked backup accounts can help you avoid these costly fees.
How Does Overdraft Protection Work?
Overdraft protection is an optional service that automatically covers transactions when your checking balance is insufficient. It may pull funds from a linked savings account, credit card, or line of credit. The transfer fee is usually lower than a standard overdraft fee, or free if linked to your own savings. You must opt in to overdraft coverage for debit card and ATM transactions.
What Is the Difference Between an Overdraft and a Declined Transaction?
If you have opted into overdraft coverage, the bank pays the transaction and charges you a fee. If you have not opted in, the bank simply declines the debit card or ATM transaction with no fee charged. Checks and automatic bill payments may still overdraft your account even without opt-in, potentially incurring fees from both your bank and the payee.
How Can You Avoid Overdraft Fees?
Set up low-balance alerts through your bank's app so you know when funds are running low. Link a savings account as a backup funding source. Use a bank that offers fee-free overdraft protection or a small overdraft cushion. Track your spending carefully and keep a buffer in your checking account to absorb unexpected charges.
Frequently asked questions
Can overdrafts affect my credit score?
A single overdraft typically does not affect your credit score. However, if you leave an overdrawn balance unpaid for an extended period, the bank may send it to collections, which will appear on your credit report and damage your score.
How many overdraft fees can a bank charge in one day?
Policies vary by bank. Some cap overdraft fees at one per day, while others allow multiple fees — sometimes four to six in a single day. Check your bank's fee schedule to understand your exposure.
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Related terms
Checking Account
A checking account is a bank account designed for everyday transactions like paying bills, making purchases, and withdrawing cash.
Minimum Balance
A minimum balance is the lowest amount of money you must keep in a bank account to avoid fees or qualify for benefits like higher interest rates.
Bank Statement
A bank statement is a monthly document from your bank summarizing all transactions, deposits, withdrawals, fees, and your account balance.
Direct Deposit
Direct deposit is an electronic payment method that transfers funds — like your paycheck — directly into your bank account on payday.