JagInsights › Glossary › Overdraft
What is an overdraft?
An overdraft is a payment that goes through when the checking account does not have the money. What it costs, and what declining the payment does instead.
An overdraft happens when a debit, check, or automatic payment is paid even though the checking balance is too small. The bank covers it and charges a fee, or the payment is declined.
Worked example
The account has $18. A $40 grocery debit is approved anyway. The bank may charge an overdraft fee on that item, and a second fee if another payment posts the same day. Declining the $40 at the register is embarrassing. It is cheaper than two fees.
Why it matters
Overdraft fees are how a $9 coffee becomes a $45 coffee. The fee is not interest. It is a penalty for a payment the bank chose to pay.
Questions people ask
Is overdraft protection a savings account?
Often it is a linked savings transfer or a small line of credit. Read the disclosure. Some 'protection' is just the fee-charging overdraft, renamed.
Does the bank have to pay the overdraft?
No. It can decline the payment. You can also opt out of overdraft on everyday debit-card purchases.
Will an overdraft hit my credit score?
The fee itself does not. Unpaid overdraft that is sent to collections can.
Educational information only. JagInsights is not a financial adviser, broker, or lender. See the Terms and Privacy Policy.