overdraft

An overdraft is a financial arrangement in which a bank account allows spending or withdrawals beyond the available balance, resulting in a negative balance. Overdrafts can occur when a debit card purchase, a check, or an automatic payment posts after funds have been depleted, or when holds temporarily reduce the available balance. Because posting occurs in different stages, a person may think they have funds but a transaction pushes the account into overdraft.

There are two main forms: arranged (authorized) overdraft, where the bank has approved a credit limit and may charge interest or a fee for borrowing; and unarranged (unauthorized) overdraft, where there is no such agreement and typically carries higher fees or penalties. Some banks offer overdraft protection or linked accounts to cover shortfalls, while others may decline transactions that would create an overdraft.

Fees and costs vary by institution and country. They may include per-item charges, daily fees, or interest on negative balances, as well as fees for returned payments. The total cost depends on how long the account remains negative and how many items trigger overdrafts.

Consequences can include additional fees, declined payments, or checks bouncing, potential damage to credit reports where reported, and cash-flow problems for the account holder. To avoid overdrafts, individuals can monitor balances closely, set low-balance alerts, maintain a buffer in the account, link a savings or credit line for protection, or adjust automatic payments and spending.

Regulatory and market practices vary by region. Some jurisdictions require opt-in for paid overdrafts or limit fee structures, while others rely on transparent disclosures and account terms.