Overdraft definition
/What is an Overdraft?
An overdraft is a short-term line of credit granted by a bank to an account holder when checks presented against the account exceed the amount of cash available in the account. An account usually has to be designated as having overdraft protection before this feature will be operable. The amount of an overdraft is usually capped at an overdraft limit, so that account holders will not abuse the privilege. A variation on the concept is to link a savings account to a checking account at the same bank, so that any overdrafts in the checking account are automatically taken from the savings account to pay for the overdraft. This service keeps account holder checks from bouncing.
The interest charges and transaction fees charged for overdrafts generate significant profits for banks. However, when faced with excessive usage and the prospect of not being paid back by an account holder, a bank may unilaterally cancel overdraft protection.
The Cost of Overdraft Protection
Banks can charge substantial fees in exchange for providing overdraft protection. This can come as quite a surprise for account holders who sign up for this service after having opened an account. To avoid this surprise, always inquire about the cost of overdraft protection when you are initially researching opening a checking account.
Terms Similar to Overdraft
An overdraft is also known as a bank overdraft.