overdrafts

An overdraft occurs when withdrawals from a bank account exceed the available funds, resulting in a negative account balance. Banks may offer overdraft services to cover shortfalls and prevent a payment from being rejected. These services can be arranged (authorized) with a predetermined limit or line of credit, or unarranged (unauthorized) when the bank covers a transaction without prior agreement. Authorized overdrafts are typically cheaper and easier to manage, while unauthorized overdrafts often carry higher fees and interest and may be treated as short-term debt.

How overdrafts work varies by institution and jurisdiction. When a transaction posts that exceeds the balance, the account becomes overdrawn. Some banks apply a grace period or process transactions in a specific order, so the timing of postings matters. Costs include per-item fees, daily overdraft charges, or interest on the negative balance. Arranged overdrafts usually have a fixed limit and ongoing charges, while unarranged overdrafts can be declined or trigger higher fees and penalties.

Protections and limits: Many banks allow customers to opt in or out of overdraft coverage. Overdraft protection may connect an account to a savings balance or to a separate line of credit, often at a lower cost than standard overdraft fees. Some jurisdictions cap overdraft fees or require clear disclosure of terms. Repeated overdrafts may lead to account closure or to collections or credit reporting in some cases, depending on policy.

Management and best practices: Overdrafts can prevent certain transactions from bouncing but are costly if used regularly. To minimize costs, monitor balances, set alerts, maintain a cash cushion, link accounts for automatic transfers, and understand the terms of any overdraft service offered by the bank.