what is an overdraft 
an overdraft occurs when there isn t enough money in an account to cover a transaction or withdrawal but the bank allows the transaction anyway essentially it s an extension of credit from the financial institution that is granted when an account reaches zero the overdraft allows the account holder to continue withdrawing money even when the account has no funds in it or has insufficient funds to cover the amount of the withdrawal investopedia madelyn goodnightunderstanding overdraftswith an overdraft account a bank is covering payments a customer has made that would otherwise be rejected or in the case of actual physical checks would bounce and be returned without payment basically an overdraft means that the bank allows customers to borrow a set amount of money there is interest on the loan and there is typically a fee per overdraft at some banks an overdraft fee can run upwards of 37 1as with any loan the borrower pays interest on the outstanding balance of an overdraft loan often the interest on the loan is lower than the interest on credit cards making the overdraft a better short term option in an emergency 2 in many cases there are additional fees for using overdraft protection that reduce the amount available to cover your checks such as insufficient funds fees per check or withdrawal while banks can charge overdraft fees they can t change the order of a customer s transactions to collect more overdraft fees in 2010 wells fargo was fined 203 million for the predatory practice of structuring customer withdrawals in a way that maximized overdraft fees 3in 2023 the consumer financial protection bureau cfpb found some financial institutions charged unfair overdraft fees by authorizing an atm or debit transaction made when the customer had a positive balance but later charging an overdraft fee because intervening transactions went through before the debit settled the cfpb found customers couldn t reasonably avoid these surprise fees it told the banks and credit unions to stop charging overdraft fees in these situations and a number of them have come up with plans to refund customers who were charged the fees in the past 4special considerationsyour bank can opt to use its own funds to cover your overdraft 5 another option is to link the overdraft to a credit card if the bank uses its own funds to cover your overdraft it typically won t affect your credit score 6 when a credit card is used for overdraft protection it s possible that you can increase your debt to the point where it could affect your credit score however this won t show up as a problem with overdrafts on your checking accounts if you don t pay your overdrafts back in a predetermined amount of time your bank can turn over your account to a collection agency this collection action can affect your credit score and get reported to the three main credit agencies equifax experian and transunion it depends on how the account is reported to the agencies as to whether it shows up as a problem with an overdraft on a checking account if an overdrawn account isn t paid off in time the bank may turn the debt over to a collection agency overdraft protectionsome but not all banks will pay overdrafts automatically as a courtesy to the customer while charging fees of course overdraft protection provides the customer with a further tool to prevent embarrassing shortfalls that reflect poorly on your ability to pay usually it works by linking your checking account to a savings account other checking account or a line of credit if there s a shortfall this source gets tapped for the funds ensuring that you won t have a check returned or a transaction transfer declined it also avoids triggering a non sufficient funds nsf charge the dollar amount of overdraft protection varies by account and by bank often the customer needs to specifically request it there are a variety of pros and cons to using overdraft protection but one thing to bear in mind is that banks aren t providing the service out of the goodness of their hearts they usually charge a fee for it as such customers should be sure to rely on overdraft protection sparingly and only in an emergency if the overdraft protection is used excessively the financial institution can remove the protection from the account 