When you have a checking account, there's no little birdie that sits on your shoulder and warns you when you're writing a check for more than you have in your account. An overdraft is the act of writing a check for more than you have in your account, and being overdrawn is the result of having a negative balance in your account.
When you overdraft your account you have spent more money than the balance available. In order to prevent this, try downloading your mobile banking app to keep track of your funds.
Your account is overdrawn when you try to transfer more money out than you currently have in the account. For example, say you have $500 in your checking account and your landlord tries to cash your $600 monthly rent check. Obviously, there's not enough money in your bank account to cover the entire check. Whether or not your bank will honor the attempt to cash your check depends on if you have overdraft protection.
Depending on your bank and whether you've authorized overdrafts, your bank might still honor checks you write for more than the current balance of your account. For example, say you write a check for $600 when you only have $500 in the bank. If you have overdraft protection for at least $100, your bank will still cash the check, your balance will just drop to negative $100. In addition, many banks reserve the right to refuse to accept a transaction and won't accept ATM withdrawals that overdraw your account unless you authorize them ahead of time.
Costs of Overdrafts
Not only do you have to pay the money back, your bank also will charge you fees on the amounts withdrawn. Typically, you'll pay about $30 to $40 per overdraft. However, some banks and credit unions make exceptions for overdrafts of less than $5. Citizens Bank advertises such a policy, called $5 Overdraft Pass.But, if your account remains overdrawn for several days, you could be charged an additional fee. For example, if you overdraw your account on Monday and don't deposit additional money until the following Tuesday, you might see even more fees.
Some banks also offer to link another account to your checking account so that money is automatically transferred from that account to your checking account if it gets overdrawn. For example, say you have both your checking account and savings account at the same bank. The bank might allow you to link the two so that if you write a $600 check with only $500 in your checking account, the bank will automatically transfer $100 from your savings account to your checking account so it doesn't get overdrawn. However, you might be charged a fee for this service. For example, Santander Bank and Bank of America can charge a fee of $12 for this service, depending on your account terms.
- Merrian Webster: Overdraft
- Merrian Webster: Overdrawn
- Virginia Credit Union: What You Need to Know about Overdrafts and Overdraft Fees
- Soverign Bank: Do You Offer Overdraft Protection?
- Bank of America: Overdraft Services FAQ
- Bank of America: Personal Schedule of Fees
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Based in the Kansas City area, Mike specializes in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."