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Banking

Overdraft fee

Also called: overdraft charge

An overdraft fee is a charge a bank or credit union may add when it pays a transaction that your account does not have enough money to cover. The account goes negative, and you owe both the shortfall and the fee.

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How it works

When a card purchase, check or automatic payment is larger than your available balance, the institution can either pay it or turn it down. If it pays, your balance drops below zero and an overdraft fee may be added on top. Fee amounts, and any daily limits on how many fees can be charged, vary by institution and appear in the account’s fee schedule.

Federal rules treat transaction types differently. An overdraft fee on an ATM withdrawal or a one-time debit card purchase is allowed only if you have opted in to that coverage, and you can withdraw that consent at any time. Saying no cannot change your other account terms. Checks and recurring electronic payments, such as automatic bill payments, are outside the opt-in rule and can trigger fees whether or not you opted in.

Some accounts offer other ways to cover a shortfall, such as an automatic transfer from a linked savings account or an overdraft line of credit. These fall outside the opt-in rule and can have their own costs, such as a transfer fee or interest. Low-balance alerts, and keeping track of pending transactions and scheduled payments, can help you spot a shortfall before it happens.

Related terms

Sources and further reading

Examples are illustrative and focus on U.S. personal finance. This page is educational, not individual financial, investment, tax, or legal advice. Read our editorial approach or report a correction.

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