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How Do Overdrafts Happen, and How Can I Avoid It?

An overdraft can happen when you write a check, withdraw money from an ATM, use your debit card to make a purchase, or make an automatic bill payment or other electronic payment for more than the available funds in your checking account.

A transaction that brings your account into a negative balance is called an overdraft. A transaction that would bring your account negative but the bank returns unpaid is called non sufficient funds or insufficient funds transaction.

Banks may charge a fee for either an overdraft or a returned unpaid transaction. Each bank is different as it applies to the fees charged, and these fees may vary depending on the amount of the negative balance, or even the number of overdraft or nonsufficient funds transactions you have had previously. If you don’t bring your account to a positive balance, you may also be charged additional negative balance fees.

When a transaction is not paid, your check or payment will be returned and the bank can charge you a “overdraft returned” fee. Also, recipients of non-paid items can also charge you fees of their own, independent of any bank fees you may owe. But that’s not all. If you do not address overdraft fees or fail to correct the situation, you run the risk of your account being closed. In addition, this information may be reported to other banks and could keep you from opening another account elsewhere.

Overdraft Protection Programs

Most banks offer various forms of overdraft protection plans for checking accounts. This is a separate account, like a savings account, that is linked to your checking account and can be used to transfer funds automatically if a transaction will overdraw your checking account.


Keep in mind you must have sufficient funds in your linked account to cover the overdraft and any overdraft protection transfer fees. You must be aware of the specific transaction limitations imposed on savings accounts. It is always best to talk to a banker for complete details on overdraft protection plans.

The best way to avoid overdraft fees? Never spend more than you have.

One sure way to avoid fees associated with overdrafts is to manage your account so you don’t trigger an overdraft. Keep track of how much money you have in your account by recording all: debit card purchases, checks written, ATM withdrawals and fees, and automatic bill payments or other electronic payments. With online banking you can view your account balance daily and review your account statements monthly. Also, set up account alerts via email or mobile device to notify you when your checking account balance is low or becomes negative.


If you overdraw your account, you need to deposit enough money into your account to cover the overdraft and any fees that were charged to your account as soon as possible. If you find you are having difficulties with your account, it is important to contact your bank immediately.

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