What is bank overdraft and example?

A bank overdraft occurs when a customer withdraws more money from their bank account than is available, resulting in a negative balance. The bank may allow the transaction to go through, but will charge an overdraft fee.

For example, if a customer has $100 in their account and makes a purchase for $150, the account will be overdrawn by $50. The bank may allow the transaction to go through, but will charge an overdraft fee for the amount that exceeds the available balance.

Bank Overdraft

A bank overdraft occurs when you withdraw more money from your bank account than you have available. When this happens, the bank allows you to borrow the additional amount, known as an overdraft fee.

Example:

Let's say you have a bank account with a balance of $100. You withdraw $120 from an ATM. In this case, you have gone over your available balance by $20. The bank will cover the $20 overdraft and charge you an overdraft fee, which could range from $5 to $35.

Consequences of Overdraft:

- Overdraft fees: Banks charge high fees for overdrafts, which can add up quickly.
- Damaged credit score: Overdrafts can be reported to credit bureaus and negatively impact your credit score.
- Closed bank account: If you repeatedly overdraw your account, the bank may close it.

Avoiding Overdrafts:

- Track your spending and keep a close eye on your account balance.
- Set up overdraft protection by linking your account to a savings account or credit line.
- Consider using a debit card instead of a checkbook to avoid overdrawing.
- Contact your bank to adjust your overdraft limit or disable overdraft protection.