Overdraft

What It Means

An overdraft happens when a payment or purchase is bigger than the money in your checking accountChecking accountA bank or credit union account for everyday money going in and out, used by debit card, checks, transfers and direct deposit. See more and your bank or credit unionCredit unionA not-for-profit financial cooperative owned by its members, offering accounts and loans to people within the field of membership its charter sets. See more pays it anyway. Your balance drops below zero, you owe that amount back, and most banks add a flat fee for each item they cover. According to the CFPB, that fee is usually the same whether the purchase was $5 or $500, and more than one fee can land on the same day.

How It Sounds at Home

• "I overdrew my account by twelve dollars."
• "The card went through, but now I'm negative."
• "Payday isn't until Friday and I'm already overdrawn."

The Breakdown

Worked example. Jordan has $40 in checking on Tuesday and makes three card purchases before payday. Jordan's bank covers overdrafts for $35 each, an example fee that matches the median the CFPB found in 2023 at large banks and credit unions still charging one.

Jordan spent $67 on purchases and now owes the bank $97 before the next paycheck lands. With its fee, the $12 lunch cost $47.

What the result means. Every purchase that posts while the balance is below zero can bring its own fee, and a small one costs as much as a big one. CFPB research found that small debit purchases can lead to expensive overdraft charges, which is why checking your available balanceAvailable balanceThe money in a bank account you can use right now: the posted balance minus pending card purchases and any deposit the bank is still holding. See more before you tap your card matters more than the size of the purchase.

Which payments can overdraw. Checks and automatic payments (ACH) are often covered for a fee under the account's standard terms. For ATM withdrawals and one-time debit card purchases, federal Regulation E says the bank must get your opt-in before it can charge an overdraft fee.

Good to Know

Under Regulation E (12 CFR 1005.17), a bank can't charge you an overdraft fee on an ATM withdrawal or a one-time debit card purchase unless you opted in, and the CFPB says you can change that choice at any time by telling your bank. When a bank declines a check or automatic payment instead of paying it, HelpWithMyBank.gov, run by the OCC, says you may be charged a nonsufficient funds (NSF) fee, and banks don't need your opt-in for that one. Your own account agreement and fee schedule set the amounts, so read them before you rely on any figure here.

Related Terms and Categories

• Overdraft fee

  The flat charge a bank adds each time it pays a transaction your checking account couldn't cover, on top of the negative balance you repay.

• Overdraft protection

  A bank service that covers a checking shortfall, either by moving money from a linked account or by paying the item and charging an overdraft fee.

• Available balance

  The money in a bank account you can use right now: the posted balance minus pending card purchases and any deposit the bank is still holding.

• Pending transaction

  A card purchase or other payment the bank has approved but that hasn't settled yet; it lowers your available balance before it reaches your account balance.

• Checking account

  A bank or credit union account for everyday money going in and out, used by debit card, checks, transfers and direct deposit.

• Bank reconciliation

  Checking your own record of a bank account against the bank's statement, line by line, and explaining every difference until the two balances agree.

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