An overdraft happens when you spend more money than you have in your checking account, but your bank still lets the payment go through.
Imagine you have $50 in your account, and you try to buy groceries for $60. If your bank allows the $60 purchase, your account goes into overdraft, and you’ll usually be charged an overdraft fee—often around $10.
How an Overdraft Works
Banks don’t have to approve every overdraft. It’s up to them whether they let a transaction go through when you don’t have enough money. If your bank decides not to cover the payment, the transaction is declined, and you won’t get an overdraft fee from the bank. Keep in mind, though, the store or company you were paying might charge a separate fee.
Overdrafts give you a short-term cushion when money runs low, but they can add up quickly if you’re not careful. Some banks even offer “overdraft protection” plans that link your checking account to a savings account or a line of credit. This can help avoid declined transactions or high fees.
Examples in Real Life
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Buying groceries: You spend $100 on groceries but only have $80 in your account. The bank covers the extra $20, but you pay a $10 overdraft fee.
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Paying bills: If your utility bill is $120 and your account balance is $100, the bank might cover the extra $20. You’ll owe the $20 plus the overdraft fee.
Tips to Avoid Overdrafts
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Keep track of your account balance regularly.
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Set up alerts for low balances.
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Consider linking a savings account for overdraft protection.
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Know your bank’s overdraft policies and fees.
Overdrafts can be helpful in a pinch, but they’re not free money. Understanding how they work and planning ahead can save you money and stress.
