Definition:
A bank overdraft occurs when a customer writes a check or makes a withdrawal that exceeds their available balance. In essence, it’s like borrowing money from the bank.
Key points about bank overdrafts:
- Overdraft protection: Many banks offer overdraft protection, which allows customers to make withdrawals or pay bills even if they don’t have sufficient funds in their accounts. However, this often comes with fees.
- Fees: Banks typically charge fees for overdrafts, which can be significant.
- Credit score: Frequent overdrafts can negatively impact a person’s credit score.
- Avoiding overdrafts: It’s important to monitor your account balance regularly and avoid overdrafting to avoid fees and potential damage to your credit score.
Why do banks allow overdrafts?
- Convenience: Overdraft protection can be convenient for customers, especially in unexpected situations.
- Revenue: Banks can earn revenue from overdraft fees.
However, it’s important to be aware of the risks and costs associated with overdrafts and to take steps to avoid them.
In essence, bank overdrafts occur when a customer withdraws more money than they have in their account, and they can result in fees and potential damage to credit scores.
