What Is a Bank Overdraft?

What Is a Bank Overdraft?

By Charles Joseph | Editor, Financial Affairs
Reviewed by Corey Michael | Senior Financial Analyst

A bank overdraft is a feature from financial institutions that allows an account holder to withdraw money exceeding what they currently hold in their bank account. Essentially, it works like a loan. Depending on the bank’s policy, some may allow you to buy items or pay for services even if it means your account goes into a negative balance. These policies exist to aid in financial shortfalls or emergencies. However, keep in mind that charges such as interest and overdraft fees usually come with this benefit.

Related Questions

1. What happens when you go into overdraft?

When you go into overdraft, it means you have exhausted all the funds in your bank account but are still making more transactions. These transactions are covered by your bank under an agreed overdraft limit. However, you may be charged an interest or an overdraft fee for borrowing the bank’s money.

2. Is it bad for your credit score to use an overdraft?

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Ordinarily, using your overdraft shouldn’t affect your credit score. If you stay within your overdraft limit it will act as a regular part of your account. However, if you frequently go beyond your agreed limit, this can become a factor in lending decisions and could hinder your credit score.

3. How do I avoid overdraft fees?

There are several ways to avoid overdraft fees. You could opt-out of automatic overdraft protection, which means any transaction that exceeds your balance would be denied. Also, keeping tabs on your bank account balance can help you avoid unexpected overdrafts. Many banks also offer account balance alerts.

4. Can I pay off my overdraft in installments?

Yes, in some cases, you can agree with your bank to pay off your overdraft in installments. It’s always beneficial to liaise with your bank in such matters. This can help to manage your financial situation more effectively.

5. What if I can’t pay back my overdraft?

If you can’t pay back your overdraft, it’s crucial to get in touch with your bank promptly. Banks could help by giving you more time to pay or by setting up a plan to help you pay back the overdraft incrementally. If you ignore your overdraft, the bank could take legal action, so it’s better to address the situation as soon as possible.