What is an Overdraft? | Definition, Types, and How to Avoid Fees

Overdrafts can be a convenient way to cover unexpected expenses, but they can also be expensive. In this article, we will discuss what an overdraft is, the different types of overdrafts, and how to avoid overdraft fees.

You will also learn about the pros and cons of using an overdraft, and when it is not the best option. 

Overdraft Definition

An overdraft is a type of short-term loan that allows you to spend more money than you have in your bank account. When you use your overdraft, your bank will lend you the money you need, and you will have to pay it back with interest.

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Overdraft Types

There are two main types of overdrafts: authorized overdrafts and unauthorized overdrafts.

Authorized overdrafts are overdrafts that you have agreed to with your bank. When you open a bank account, you may be offered an authorized overdraft limit. This is the maximum amount of money that your bank will lend you if you go overdrawn.

Unauthorized overdrafts are overdrafts that you have not agreed to with your bank. These can happen if you make a payment that exceeds your available balance, or if you do not have enough money in your account to cover a bounced check.

Why Do People Use Overdrafts And How Do Overdrafts Work?

People use overdrafts for a variety of reasons, including:

  • To cover unexpected expenses, such as a medical bill or car repair.
  • To bridge the gap between paychecks.
  • To make a large purchase that they cannot afford to pay for in full right away.
  • To build their credit history.

Overdrafts work by allowing you to spend more money than you have in your bank account. When you use your overdraft, your bank will lend you the money you need, and you will have to pay it back with interest.

When you use your overdraft, your bank will charge you a fee. The amount of the fee will vary depending on your bank and your overdraft limit.

Overdrafts can be a convenient way to cover unexpected expenses, but they can also be expensive. If you are considering using an overdraft, it is important to weigh the pros and cons carefully.

How Much Do Overdraft Fees Cost?

An overdraft fee is a charge that a bank may charge you if you spend more money than you have in your account. Overdraft fees can be expensive, and they can add up quickly if you are not careful.

The amount of an overdraft fee varies depending on your bank and your overdraft limit. However, overdraft fees typically range from $30 to $35 per transaction. Some banks may also charge a daily overdraft fee, which is a fee that is charged each day that your account is overdrawn.

How To Avoid Overdraft Fees

Overdraft fees can be a major financial burden, especially if you are struggling to make ends meet. If you are concerned about overdraft fees, there are a few things you can do to avoid them:

  • Set up a budget and track your spending. This will help you to avoid spending more money than you have.
  • Make sure that you know your authorized overdraft limit. Do not spend more money than your authorized overdraft limit, or you will be charged an overdraft fee.
  • Sign up for overdraft protection. Overdraft protection is a service that allows your bank to cover your overdrafts with a line of credit or a linked savings account. This can help you to avoid overdraft fees, but it may also come with fees of its own.
  • Pay back your overdraft as soon as possible. The longer you take to pay back your overdraft, the more interest you will have to pay.
  • If you do go overdrawn, be sure to talk to your bank about your options. Some banks may be willing to waive or reduce your overdraft fees if you are experiencing financial hardship.
  • Use a credit card instead of your debit card. Credit cards do not typically charge overdraft fees, so you will only be charged interest if you do not pay your bill in full each month.
  • Link your checking account to a savings account. This way, if you go overdrawn, your bank can automatically transfer money from your savings account to cover the overdraft.
  • Set up alerts on your phone or email so you are notified when your account balance is low. This will give you a warning before you go overdrawn and allow you to transfer money into your account or make other arrangements.

Overdraft fees can be a costly burden, but there are steps you can take to avoid them. By following these tips, you can protect your finances and avoid paying unnecessary fees.

Pros and Cons of Using an Overdraft

Here are some of the pros and cons of using an overdraft:

Pros

  • Overdrafts can be a convenient way to cover unexpected expenses.
  • They can also be a way to build your credit history.

Cons

If you are considering using an overdraft, it is important to weigh the pros and cons carefully. If you are struggling to manage your finances, looking for other options, such as a personal loan or a credit card may be better.

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Frequently asked questions

An overdraft is a type of short-term loan that allows you to spend more money than you have in your bank account. When you use your overdraft, your bank will lend you the money you need, and you will have to pay it back with interest.

There are two main types of overdrafts: authorized overdrafts and unauthorized overdrafts.

  • Authorized overdrafts are overdrafts that you have agreed to with your bank. When you open a bank account, you may be offered an authorized overdraft limit. This is the maximum amount of money that your bank will lend you if you go overdrawn.
  • Unauthorized overdrafts are overdrafts that you have not agreed to with your bank. These can happen if you make a payment that exceeds your available balance, or if you do not have enough money in your account to cover a bounced check.

Overdraft fees are charged by banks when you spend more money than you have in your account. The amount of the overdraft fee varies depending on your bank and your overdraft limit. However, overdraft fees typically range from $30 to $35 per transaction. Some banks may also charge a daily overdraft fee, which is a fee that is charged each day that your account is overdrawn.



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