Overdraft is a money term you need to understand. Here’s what it means.

What is an overdraft?

An overdraft occurs when the amount withdrawn from an account exceeds the available balance. It is also sometimes referred to as “insufficient funds.”

Deeper definition

It is not just checking accounts that can be overdrawn. It is also possible to withdraw more money from a savings or money market account than is available. Most banks charge around $35 for one overdraft item.

Overdraft fees are a type of short-term lending, for which banks charge fees rather than interest.

Overdraft examples

Say you expected a check for $2,000 to be deposited in your checking account on payday and paid your bills as usual. If, for some reason, the deposit was not made by the time the checks cleared, you could be charged a separate fee for each check. If four checks bounced, your fees alone would be around $140.

You also may be charged an “extended overdraft fee,” if your balance remains in the red. For example, after five days of a negative balance some banks charge $35 more while other banks charge up to $6.99 per day after the fourth day of negative balance.

Read up on these five ways you may get nicked by bank fees.

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