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What are Overdraws?

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  • Written By: Jessica Ellis
  • Edited By: Bronwyn Harris
  • Last Modified Date: 01 September 2016
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Overdraws, also called overdrafts, occur when a person attempts to spend an amount higher than an account or credit balance. This may occur because of simple mistakes, poorly synchronized deposits and withdrawals, poor budgeting, or even malicious intent. Avoiding overdraws can be important, since many banks and creditors charge a hefty fee for covering any excess withdrawals.

Typically, overdraws occur when people do not know or realize that they are close to their account limit. This may occur when income deposits are not made on time, or when a person has not paid careful attention to recent credit or account statements. In some cases, overdraws can occur because a bank incorrectly applies a deposit or does not credit a recent payment. Even so, many banks leave it up to the account holder to discover and rectify a bank-made mistake in order to avoid overdraft charges.

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Depending on the type of account, different things may happen when an overdraw occurs. If a person overdraws using a debit or credit card, the purchase may be declined at the time of purchase. In some cases, a notification of insufficient funds will be returned, but in other systems, no reason for the decline may be provided. Some banks and credit lines offer overdraft protection, which means that the bank will admit the purchase and charge the account holder for the excess balance, plus fees, following the transaction. In cases where a person overdraws using a check, the check may bounce, which usually also includes a fee for the returned check.

In many regions, it is a crime to knowingly overdraw an account. Though this is often difficult to prove, a person who intentionally writes bad checks or overdraws an account may be subject to fines and even jail time. Fortunately, in addition to overdraft protection, there are several things a person can do to prevent accidental overdraws.

One of the best ways to avoid overdraws is to find out if an account has an automatic balance warning system. This helpful protection can send texts or emails whenever balance dips below a certain level, which can prevent a person from accidentally withdrawing too much or overspending. Account level warning systems are often free to use, and can be of great assistance for anyone with chronic accidental overdraft problems.

The best way to avoid overdraws is to keep careful track of accounts. Account holders should check their bank statements regularly, in order to help spot any discrepancies that may lead to overdrafts. For people that use joint accounts, it is important to maintain good communication about withdrawals and deposits in order to avoid accidental overdrafts.

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