Overdraft
When a bank account balance falls below zero due to a transaction exceeding available funds.
What is Overdraft?
An overdraft occurs when a transaction — a check, debit purchase, or automatic payment — exceeds the available balance in a checking account. Banks may cover the transaction (overdraft protection) and charge an overdraft fee, typically $25–$35 per occurrence, or decline it (resulting in a returned payment fee). Linked overdraft protection transfers from a savings account or credit line can reduce fees. The CFPB has pushed for fee reforms, and many banks have voluntarily eliminated overdraft fees or reduced them. Opting out of overdraft "protection" means transactions are declined rather than covered.
Example
A $3 coffee purchase clears a checking account with a $2.50 balance. The bank covers it and charges a $35 overdraft fee — making the effective cost of the coffee $38. Repeated overdrafts can trap lower-income consumers in fee spirals.
Source: Consumer Financial Protection Bureau — Overdraft Fees