What happens when you overdraft

An overdraft occurs when you spend or withdraw more money than you have in your account. Your bank covers the difference temporarily, but you now owe that money back to the bank. The bank is essentially giving you a short-term loan without you formally asking for one.

Here is the sequence: you swipe your debit card for $40 when your balance is $25. The transaction goes through. Your balance drops to negative $15. The bank has paid the merchant the full $40 from its own funds. You now have a negative balance and owe the bank $15 plus any overdraft fees they charge.

Not every transaction triggers an overdraft. Some banks decline the transaction outright if you do not have enough money. Others allow it to go through and charge you a fee. The rules depend on your bank and the type of account you have.

Key Takeaways

  • An overdraft means your bank paid a transaction you could not afford, and you now owe them money plus a fee.
  • Overdraft fees typically range from $25 to $35 per transaction, though the exact amount varies by bank and account type.
  • You can turn off overdraft protection to prevent transactions from going through if you lack funds, which stops the fees but may cause declined transactions instead.
  • Paying back an overdraft means depositing money to bring your balance back to zero or positive.

How overdraft fees work

When your bank covers an overdraft, they charge you a fee for doing so. This fee is separate from the amount you owe back. If you overdraft by $15 and your bank charges a $35 overdraft fee, you now owe $50 total: the $15 you spent plus the $35 fee.

The fee amount depends on your bank. Some charge $25 per overdraft. Others charge $30, $35, or more. A few banks charge nothing, though this is uncommon. Check your account agreement or call your bank to find out what they charge.

Multiple overdrafts in one day can mean multiple fees. If you overdraft three times in a single day, you may be charged three separate overdraft fees, one for each transaction. Some banks cap the total fees you can be charged in a day, but not all do.

Overdraft protection versus overdraft fees

Overdraft protection is a service some banks offer that links your checking account to a savings account or credit line. If you overdraft, the bank automatically transfers money from the linked account to cover it. You pay a small transfer fee instead of a large overdraft fee, or sometimes no fee at all.

This is different from simply allowing overdrafts. With overdraft protection, the bank moves money to prevent the negative balance. Without it, the bank lets your balance go negative and charges you a fee.

You can also turn off overdraft protection entirely. This means transactions will be declined if you do not have enough money. You will not overdraft, and you will not pay overdraft fees. Instead, your card will simply not work. Some people prefer this because it prevents surprise fees, even though it means transactions fail at the register.

How to pay back an overdraft

Paying back an overdraft is straightforward: deposit money into your account. The deposit goes toward your negative balance first, then any remaining amount becomes your new positive balance.

For example, if you are overdrawn by $50 (including the fee) and you deposit $100, your new balance is $50. If you deposit $40, your balance is still negative $10, and you still owe the bank money.

You can deposit money by direct deposit, transfer from another account, cash deposit at a branch or ATM, or check deposit. The deposit takes effect immediately if you use an ATM or branch. Transfers and direct deposits may take one to two business days to post, depending on your bank.

What happens if you stay overdrawn

If you do not deposit money to cover your overdraft, your negative balance remains. Some banks charge a daily fee for staying overdrawn, on top of the initial overdraft fee. Others charge a fee every few days. The exact rules are in your account agreement.

Staying overdrawn for a long time can damage your banking relationship. Your bank may close your account if you repeatedly overdraft and do not pay it back. They may also report the account to ChexSystems, a banking history database that other banks check when you try to open a new account.

If your account is closed due to overdrafts, you will have a harder time opening a new account elsewhere for several years. Some banks specialize in second-chance accounts for people with this history, but they often charge higher fees.

How to avoid overdrafts

The simplest way to avoid overdrafts is to keep a buffer in your account. Many people keep $100 to $500 as a cushion so that small mistakes do not trigger fees. This is not foolproof, but it catches most accidental overdrafts.

Check your balance before large purchases. Many banks offer free balance alerts via text or email. You can set an alert to notify you when your balance drops below a certain amount, like $50. This gives you a warning before you overdraft.

Turn off overdraft protection if you prefer declined transactions to fees. This is a personal choice. Some people would rather have their card declined than pay a surprise fee. Others prefer the convenience of the transaction going through and deal with the fee later.

Use your bank's mobile app or website to monitor your account in real time. Transactions sometimes take a day or two to post, so your available balance may be lower than your current balance. Checking the app helps you see what is actually available to spend.

Overdrafts versus NSF fees

NSF stands for "non-sufficient funds." An NSF fee is charged when a transaction is declined because you do not have enough money. An overdraft fee is charged when the transaction goes through even though you did not have enough money.

The difference matters because it affects whether the transaction succeeds. With an overdraft, the merchant gets paid and you owe the bank. With an NSF fee, the merchant does not get paid and the transaction fails, but you still owe the bank a fee for the failed attempt.

Some banks charge NSF fees even if you have overdraft protection turned off. Others do not. Check your account agreement to see which fees apply to your account and under what circumstances.

Frequently Asked Questions

Can a bank refuse to let me overdraft?

Yes. Banks are not required to allow overdrafts. They can decline any transaction that would result in a negative balance. You can also request that your bank turn off overdraft coverage, which forces all transactions to be declined if you lack funds.

Will an overdraft hurt my credit score?

An overdraft itself does not appear on your credit report and does not directly hurt your credit score. However, if you stay overdrawn for a long time and your bank sends the debt to a collection agency, that can damage your credit. Most overdrafts are resolved within days, so this is uncommon.

What if I overdraft at an ATM?

ATM overdrafts work the same way as debit card overdrafts. If you withdraw more than your balance, the bank covers it and charges an overdraft fee. Some banks charge higher fees for ATM overdrafts than for other transactions, so check your agreement.

Can I dispute an overdraft fee?

You can contact your bank and ask them to reverse the fee, especially if it is your first overdraft or if you have a good account history. Banks sometimes waive one fee as a courtesy. There is no may provide, but it is worth asking. Repeated requests are less likely to succeed.

Do overdrafts affect my ability to open a new bank account?

If you resolve the overdraft quickly, it usually does not affect your ability to open a new account. If you stay overdrawn for months and your bank closes your account, that negative history may appear in ChexSystems and make it harder to open accounts elsewhere for several years.