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What is a Bank Overdraft?

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  • Written By: S. Frost
  • Edited By: A. Joseph
  • Last Modified Date: 13 November 2016
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A bank overdraft occurs when a bank account holder makes a withdrawal, typically in the form of a check or debit charge, for more than the account's current balance. A number of reasons might cause an overdraft, including human error, the time it takes for bank processing and the intentional withdrawal of excessive funds. Bank overdraft fees usually apply when an overdraft occurs.

Poor bank records often lead to overdrafts on personal bank accounts. If the bank account isn't reconciled, the users might charge more than is available in the account. The current balance listed by an automated teller machine (ATM) or on an online banking system does not include charges or checks that haven't been processed yet. A consumer who doesn't keep accurate records of spending and checks written might think he or she has that amount available. Regular reconciliation of the bank account can help prevent a bank overdraft.

Bank processing time sometimes causes a bank overdraft. Deposits to a bank account aren't always available immediately. Overnight processing of both checks and deposits sometimes results in a delay in account updates. If the consumer makes a charge against the account before a deposit is processed, an overdraft might occur.

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Banks can process checks in any order, not necessarily in the order they were written. A consumer might write several small checks followed by a larger check that creates an account overdraft. The bank has the option of honoring the large check first. This could create more bank overdraft fees if several of the small checks won't clear after the large check has been deducted from the account.

Most major banks offer a courtesy overdraft. This means that the bank will pay for charges that are overdrawn up to a certain amount, which varies by bank and might depend on the consumer's account or standing with the bank. The courtesy overdraft can apply to checks, ATM withdrawals and debit charges. Laws have been enacted that require consumers to opt in for the bank to cover debit card charges that exceed the bank account balance. These laws were made to protect the consumer from overdraft fees.

Overdraft protection is one way for consumers to avoid bank overdraft fees. Overdraft protection is a special line of credit that covers any charges beyond the bank account balance. The bank account holder is charged interest on the amount and might pay a small fee, depending on the terms of the overdraft protection. The bank might also offer overdraft protection linked to a savings account, which uses money from the linked savings account to pay the bank overdraft. Some banks also offer balance alerts that can be sent to a cell phone or email address when the account reaches a certain level.

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Discuss this Article

ysmina
Post 3

I used to have an overdraft issue frequently, before I signed up for overdraft protection with a savings account. Now, if there isn't enough money in my checking account, the money is withdrawn from my savings account. It's much better than paying overdraft fees.

burcinc
Post 2

@SteamLouis-- Why don't you set up balance alerts? It's very easy, you can even do it yourself if you have online banking. You just have to go to the settings and set it up so that alerts are sent to you when your account balance dips below a certain amount.

I'm a poor student so I set up the balance at $100. If my account balance goes below that, I get a text message and an email. It's a great way to keep track of your balance without having to log on to your account every day.

SteamLouis
Post 1

I had a bank overdraft last week. I made the mistake mentioned in the article. I didn't keep track of my pending transactions and thought that the account balance was what I had currently. I didn't realize that several payments had not gone through yet. So I made a purchase and my account went into overdraft by just a few dollars.

Even though it wasn't a huge amount, the bank charged a fee, so I ended up losing about twenty dollars when I finally deposited money into my account.

This was a good lesson though and I'm going to be more careful from now on. I've decided to look at the details of my bank account balance once every couple of days.

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