Underwriting & credit
Overdraft: Definition & Example
What Is an Overdraft?
An overdraft happens when a bank lets a transaction go through even though the account does not have enough money, leaving a negative balance that the account holder must repay, often with a fee.
What does overdraft mean?
Banks may cover overdrafts through a standard courtesy program, a link to a savings account, or an overdraft line of credit. For one-time debit card and ATM transactions, U.S. banks need the customer to opt in before charging an overdraft fee.
Overdraft fees have historically been around $35 per item, but many large banks have reduced or eliminated them, and some offer small buffers before a fee applies.
Frequent overdrafts in bank data can signal that spending regularly exceeds income or that income arrives unevenly. Reviewers usually look at frequency and trend rather than a single event.
Overdraft example
A customer has $40 in checking and buys $65 of groceries with a debit card. Because she opted into overdraft coverage, the bank approves it, her balance goes to −$25, and a fee is added. Her paycheck deposit the next day brings the account positive again.
Related terms
- NSFNSF (non-sufficient funds) means a bank account did not have enough money to cover a payment, so the bank returned the check or electronic payment unpaid, often with a fee.
- Average Daily BalanceAverage daily balance is the average amount of money in an account across every day of a period, calculated by adding each day’s ending balance and dividing by the number of days.
- Cash FlowCash flow is the movement of money into and out of an account, household, business, or property over a period. Positive cash flow means more money came in than went out.
- Bank Statement AnalysisBank statement analysis is reviewing a person’s or business’s bank transactions to estimate income, spot recurring expenses, check balances, and flag risks such as overdrafts or unusual deposits.
