An overdraft can be triggered by any action that results in a negative account balance. This might include:
An automatic payment deducted from your account when you don’t have enough money to cover the cost A check you wrote being deposited and deducted from your account later than expected, and you don’t have the available funds to cover your next purchase Making a debit card purchase in person or online and it is approved, even though there isn’t enough money in your account to cover it
When you make a purchase that brings your account balance below zero, banks decide whether to decline the purchase or pay it for you, overdrawing your account. Most of the time, a bank or credit union will base the overdraft on your available balance—the amount of money in your account that you can spend, withdraw, or cover transactions. Sometimes, your listed balance is different from your available balance, so be sure to check your available balance and verify what the bank actually believes you can spend. Additionally, know that banks might order transactions in different ways, reducing your available balance. For example, a debit might be taken out before a credit is applied, which can result in an overdraft, even if you think you have sufficient funds in your bank account.
Example of an Overdraft
Imagine that you started a new job and are waiting on your first paycheck from a new job. Your checking account balance is $125, but that will change once your pay comes through. However, there’s an issue with your payment and your paycheck is two days late. In the meantime, thinking your pay went through, you spend $150 on groceries. The transaction exceeds your balance, meaning you’ve overdrafted your account.
Overdraft Protection
Overdraft protection is an agreement between you and your bank to cover overdrafts on a checking account, which often includes a fee. If you choose overdraft protection when you set up an account with your bank, you’re usually offered a few different options:
Standard overdraft practice: This is typically the default, covering certain transactions such as automatic payments and recurring debit purchases, including a gym membership or a monthly subscription service. Overdraft protection: In some cases, a bank or credit union might allow you to link your savings account to your checking account as a form of backup. When an overdraft occurs, the bank transfers the money from the linked account and deposits it in the transaction account. Depending on the institution, this service might be free. Debit card coverage: If you want your debit transactions to go through, even if they aren’t recurring bills, you can ask about this service. Usually, though, there is a fee associated with each transaction.
Your bank may use varying terms when referring to types of overdraft choices, so it’s important to carefully read each description. Additionally, you can decline overdraft protection and save money on overdraft fees. However, if a payment is returned due to insufficient funds, you may still be on the hook for a returned payment fee.
Overdraft Fees
Fees vary according to bank or credit union, with some banks charging no overdraft fees at all. Pay attention, too, because some banks and credit unions classify overdraft protection as a line of credit. If that’s the case, you may end up paying interest on the amount of the overdraft until you pay the amount advanced to you by your financial institution.
