An overdraft occurs when you spend more money than you have in your account, and the bank covers the difference

When you write a check, use your debit card, or set up an automatic payment for more than your balance, your bank has a choice: refuse the transaction, or pay it anyway and let your account go negative. If the bank pays it, you now owe them money. That negative balance is called an overdraft.

Most banks do not have to cover overdrafts — they can straightforward decline the transaction at the point of sale or ATM. But many do cover them, either automatically or because you have asked them to. When they do, they charge you a fee, usually between $25 and $35 per overdraft. If your account stays negative for several days, you may be charged multiple fees.

The key thing to understand is that overdrafting is not information programs. You are borrowing from your bank at a very high cost, and you have to repay it.

Key Takeaways

  • An overdraft happens when you spend more than your account balance, and your bank covers the shortfall by charging you a fee.
  • Overdraft fees typically range from $25 to $35 per transaction, and you can be charged multiple fees if your account stays negative for several days.
  • You can ask your bank to turn off overdraft coverage, which means transactions will be declined instead of costing you a fee.
  • Repeated overdrafts can damage your banking history and make it harder to open accounts at other banks in the future.
  • Some banks offer overdraft protection, which links your checking account to a savings account or credit line to cover shortfalls without a fee.

How overdraft fees add up quickly

A single overdraft fee of $30 might not seem like much, but the math becomes painful fast. If you overdraw your account by $50 and the bank charges $30 to cover it, you now owe $80. If you do not deposit money to cover that $80 within a few days, many banks charge another $30 fee, bringing what you owe to $110 — more than double your original overspend.

Some banks charge overdraft fees daily or every few days while your account is negative. Others charge one fee per day, regardless of how many transactions post. The rules vary by bank, so you need to check your account agreement or call and ask. A few banks have stopped charging overdraft fees altogether, but most still do.

The real danger is that overdraft fees can trap you. If you are living paycheck to paycheck, one overdraft can push you further behind, making it harder to catch up before the next paycheck arrives.

Opting out of overdraft coverage

You do not have to accept overdraft coverage. You can contact your bank and ask them to turn it off. Once you do, transactions that would overdraw your account will straightforward be declined — your debit card will be rejected at the register, your check will bounce, or your automatic payment will not go through.

A declined transaction is inconvenient, but it costs you nothing. You will know when ready that you do not have enough money, which gives you a chance to deposit funds or cancel the transaction before anything goes wrong. Many people find this preferable to the surprise of an overdraft fee days later.

To opt out, call your bank's customer service number or visit a branch in person. Ask to turn off overdraft coverage on your checking account. Some banks may ask you to confirm this in writing, but most can do it over the phone. Write down the date and time you made the request, and the name of the person who helped you, in case there is a dispute later.

Overdraft protection as an alternative

Overdraft protection is a service that links your checking account to another account — usually a savings account you also have at the bank, or a credit line — so that if you overdraw, the bank pulls money from the linked account instead of charging you a fee.

If you have a savings account with money in it, this can be a good option. The bank will transfer just enough to cover the overdraft, and you will not pay a fee. You will have to repay yourself by moving money back into savings, but there is no penalty.

If the linked account is a credit line, the bank is essentially giving you a small loan. You will owe interest on the borrowed amount, but the interest rate is usually lower than the overdraft fee would be — and you only pay interest on what you actually borrowed, not a flat fee. However, this only works if you have a credit line available. Many banks require you to have good credit to set one up.

What happens if you do not repay an overdraft

If your account stays negative and you do not deposit money to cover it, your bank will eventually close the account and send the debt to a collection agency. At that point, you will owe not just the original overdraft amount, but also collection fees and possibly interest.

A closed account also gets reported to ChexSystems, a banking history database that most banks check before opening a new account for you. If you are in ChexSystems for an unpaid overdraft, many banks will refuse to open a checking account for you, even years later. This can make it very difficult to participate in the formal banking system.

If a collection agency contacts you about an overdraft debt, do not ignore it. Contact your original bank first and ask if you can settle the debt directly with them. If the debt has already gone to a collection agency, you can negotiate a settlement amount, often for less than the full balance.

How overdrafts affect your banking record

Unlike credit cards or loans, overdrafts do not show up on your credit report. However, they do show up in ChexSystems, which is a separate banking history system. When you explore to open a new checking account, most banks run a ChexSystems check. If you have unpaid overdrafts or a pattern of overdrafts, the bank may deny your process.

Even if you pay the overdraft, it stays on your ChexSystems record for five years. Some banks will still open an account for you, but others will not. A few banks specialize in second-chance accounts for people with ChexSystems records, but these accounts often come with higher fees and lower limits.

The best approach is to avoid overdrafts in the first place. If you do overdraw, pay it back as soon as possible and ask your bank whether they will remove the record if you maintain good standing for a period of time. Some banks will do this as a courtesy.

Preventing overdrafts before they happen

The simplest way to avoid overdrafts is to keep a buffer in your account — money you do not spend, so that small mistakes do not push you negative. Even $50 or $100 can prevent most accidental overdrafts. If you get paid weekly or biweekly, try to keep at least one week's worth of expenses in your account at all times.

Set up account alerts if your bank offers them. Many banks let you receive a text or email when your balance drops below a certain amount — say, $100. This gives you a warning before you overdraw, so you can stop spending or move money in.

Track your spending. Write down what you spend, or use your bank's app to check your balance before you make a purchase. Debit card transactions can take a day or two to show up, so your app balance might be higher than your actual available balance. If you are not sure, do not spend it.

If you have automatic payments set up — rent, insurance, subscriptions — make sure you know the exact date and amount of each one. Mark them on a calendar so you do not accidentally spend that money before the payment goes through.

Frequently Asked Questions

Can a bank charge me an overdraft fee if I did not agree to overdraft coverage?

No. Federal law requires banks to get your permission before charging overdraft fees on debit card and ATM transactions. However, overdraft fees on checks and automatic payments are handled differently — banks can charge those without your permission. If you want to avoid all overdraft fees, you need to opt out of overdraft coverage entirely.

What is the difference between an overdraft and a bounced check?

A bounced check is one that the bank refuses to pay because you do not have enough money. You will be charged a fee by your bank, and the person or business you wrote the check to may also charge you a fee. An overdraft is when the bank pays the check anyway and charges you a fee for covering the shortfall. The end result is similar — you pay a fee — but the timing and who gets paid is different.

If I overdraw my account, will it hurt my credit score?

Overdrafts do not show up on your credit report, so they will not directly hurt your credit score. However, if the overdraft goes unpaid and is sent to a collection agency, that collection account will appear on your credit report and will damage your score. The best approach is to pay any overdraft as soon as you discover it.

Can I get an overdraft fee reversed?

Sometimes. If this is your first overdraft or if you have been a good customer for a long time, call your bank and ask them to reverse the fee as a courtesy. Banks do this occasionally, especially if you can show that the overdraft was caused by a bank error or an unusual circumstance. There is no may provide, but it is worth asking.

What should I do if my account is closed due to overdraft?

Contact your bank when ready and ask if you can pay the overdraft balance to have the account reopened. If the debt has gone to a collection agency, try to negotiate a settlement. Once the debt is resolved, ask the bank to remove the record from ChexSystems if possible. Then look for a second-chance checking account at a bank that works with people who have banking history issues.