What is overdrawn checking account

An overdraft occurs when there isn't enough money in an account to cover a transaction or withdrawal, but the bank allows the transaction anyway. Essentially, it's an extension of credit from the financial institution that is granted when an account reaches zero.

The overdraft allows the account holder to continue withdrawing money even when the account has no funds in it or has insufficient funds to cover the amount of the withdrawal. Basically, an overdraft means that the bank allows customers to borrow a set amount of money.

There is interest on the loan, and there is typically a fee per overdraft. With an overdraft account, a bank is covering payments a customer has made that would otherwise be rejected, or in the case of actual physical checks, would bounce and be returned without payment. As with any loan, the borrower pays interest on the outstanding balance of an overdraft loan.

Often, the interest on the loan is lower than the interest on credit cards, making the overdraft a better short-term option in an emergency. In many cases, there are additional fees for using overdraft protection that reduce the amount available to cover your checks, such as insufficient funds fees per check or withdrawal. Your bank can opt to use its own funds to cover your overdraft. Another option is to link the overdraft to a credit card. If the bank uses its own funds to cover your overdraft, it typically won't affect your credit score.

When a credit card is used for overdraft protection, it's possible that you can increase your debt to the point where it could affect your credit score. However, this won't show up as a problem with overdrafts on your checking accounts. If you don't pay your overdrafts back in a predetermined amount of time, your bank can turn over your account to a collection agency. This collection action can affect your credit score and get reported to the three main credit agencies : Equifax, Experian, and TransUnion.

It depends on how the account is reported to the agencies as to whether it shows up as a problem with an overdraft on a checking account. Some but not all banks will pay overdrafts automatically, as a courtesy to the customer while charging fees, of course. Overdraft protection provides the customer with a further tool to prevent embarrassing shortfalls that reflect poorly on your ability to pay.

Usually, it works by linking your checking account to a savings account, other checking account, or a line of credit. It also avoids triggering a non-sufficient funds NSF charge. Overdraft protections were meant as a way to help consumers and, yes, they can be quite useful. Avoiding overdraft fees is one way to save money, but the goal should be not to incur an overdraft fee. Here are a couple of reliable ways to protect your account from overdrafts. Avoid having a low balance by keeping some extra cash in your checking account.

Keeping tabs on your account is one of the best ways to prevent overdrafts. Tracking your balance allows you to double-check your account before making any purchases or paying bills. You also have the option of choosing a checking account that does not charge overdraft fees, as more banks and credit unions are offering in Kevin Payne is a personal finance and travel writer who writes about credit cards, student loans, debt, credit, and family finances.

Kevin lives in Cleveland, Ohio with his wife and four kids. She has worked as a personal finance editor, writer, and content strategist covering banking, credit cards, insurance and investing. As a small business owner and former financial advisor, Daphne has first-hand experience with the challenges individuals face in making smart financial choices. Select Region. United States. United Kingdom. Kevin Payne, Daphne Foreman. Contributor, Editor. Editorial Note: Forbes Advisor may earn a commission on sales made from partner links on this page, but that doesn't affect our editors' opinions or evaluations.

What Is Overdraft Protection? There are other negative consequences for these failed transactions, like: Merchant fees Late fees Cancellation of accounts Cancellation of coverage for insurance Having your debit card declined, or having a check or ACH payment bounce, can be embarrassing for individuals, but, more importantly, it leads to other financial consequences, too.

How Does Overdraft Protection Work? Opt-In Overdraft Protection The standard overdraft protection offered by banks is opting in for overdraft protection. Linked Bank Account Many banks allow customers to link their checking account to another bank account, such as a savings account.

Credit Card Some banks allow customers to link a credit card to their checking accounts. Credit Line Another overdraft protection option some banks provide is opening an overdraft line of credit. Overdraft Fees While not all banks charge overdraft fees, many do, and they can add up quickly.

Ways to Avoid or Eliminate Overdraft Fees Overdraft fees are a nuisance and a drain on your finances, but they also are avoidable with some advance planning.

Link Another Account or Credit Line to Your Checking Account As mentioned earlier, many banks offer the option to link another bank account or credit card to a checking account to avoid overdrafts. But there are a few strategies you can implement to help you prevent paying this costly expense.

Online banking is one of the benefits many financial institutions offer. Signing up for online banking allows you to track and watch your checking and savings accounts closely. You can monitor money coming in and going out.

You can track your expenses in many ways. You can track them online or by using a written check register to record all of your transactions.

This will help you maintain a running account balance. Some financial institutions will alert you when your account dips below a specific amount.

Keep a little extra money in your account to cover unforeseen expenses. This can help prevent accidentally overdrafting your account. We have some great tools that can help you monitor your account balance and activity:. There are no overdraft or non-sufficient funds fees with this account.

You may also want to visit Better Money Habits to learn more about saving and budgeting or explore our Spending and Budgeting Tool. The remaining balance is available to cover the transactions we receive that day. We then post transactions to your account in the following order:. We charge overdraft fees when a transaction exceeds your available balance.

Your Account Details section in Mobile and Online Banking show transactions that posted to your account on a given day. You can see how processing transactions and holds impacted your available balance and the order in which transactions were posted to your account by viewing your Account Balance History in Online Banking.

Keep in mind that Account Balance History is only available after transactions have posted to your account. Please refer to the Personal Schedule of Fees for more details. Another option is to ask us to apply the Decline All overdraft setting to your account. Please enter the zip code for your home address so we can give you accurate rate and fee information for your location. You are using an unsupported browser version.

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