What Does Overdrawn Mean?

Woman with credit card withdraw money from an ATM.
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Banks earn as much as $17 billion in revenue from consumer overdraft and insufficient funds fees annually, the Consumer Financial Protection Bureau estimates. But the majority of customers with bank accounts don’t ever have to pay these type of charges: Only 30 percent of consumers are subject to overdraft fees annually, reports the CFPB.

To avoid being part of the 30 percent, learn what overdraft and overdrawn mean and discover ways to avoid overdraft fees once and for all.

What Does Overdrawn Mean?

To understand what overdrawn means, you first have to understand the meaning of overdraft. An overdraft occurs when you don’t have enough money in your account to cover a payment or withdrawal, and your bank covers it for you. As a result, your account will have a negative balance or become overdrawn.

Before you can overdraft your account, however, bank regulations require you to opt-in for overdraft protection, which authorizes your bank to honor overdrafts — for a fee. If you choose not to opt-in, your bank won’t pay any charges in excess of your account balance, leading your payment to be declined.

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Types of Transactions That Cause Overdrafts

Any attempt to pay for something or withdraw money in excess of your account balance can result in an overdraft — meaning you’ll owe bank fees. Here are a few times overdrafts can happen and catch you off guard.

  • Automatic Payments: Setting up automatic payments can help you save money and make your financial life simpler, but if you forget the bills are coming, automatic payments can cause an overdrawn bank account.
  • Pending Transactions and Uncashed Checks: Not all transactions post to your account immediately after you swipe your card or write a check. For example, if you write your landlord a rent check, she might not cash it for a week. During that time, you will have a pending payment because the check has not been presented to your bank for payment. In the event that you spend additional funds and lower your account balance before the check is paid, it could result in a checking account overdraft.
  • ATM Withdrawals: When you need cash fast, you can forget to check your account balance first to make sure you have enough for pending transactions or uncashed checks. Consider signing up for low balance alerts, so you’ll know when you’re in danger of not having enough funds in your account.
  • Merchant or Bank Errors: An error in how much you are charged or how much your paycheck is recorded as can result in an overdrawn account. For example, if a store mistakenly charges you $100 for a $10 purchase or if a banking computer reads your paycheck as $250 instead of $2,500, you can be left with insufficient funds. These types of errors are not your fault, however, and you can get them corrected.

Overdraft Fees and How to Minimize Them

When you have an account with overdrafts — meaning you’ve spent more than you have in the account — add money to the account as soon as possible to minimize expensive fees. The median overdraft fee is $34 at the 50 largest banks in the country and slightly lower, at $31, for smaller banks and credit unions, reports the CFPB. For example, Wells Fargo charges $35 per item and U.S. Bank charges $36.

Also, banks might charge an extended overdraft fee if your account is overdrawn for several days. Chase, for example, charges an extra $15 fee on most accounts that are overdrawn for five consecutive days. By depositing extra cash into an overdrawn account, you can limit the fees.

The most effective way to get an overdraft fee waived is simply to ask. If you call your bank and explain the mistake, they’ll often get rid of the fee, saving you more than $30. If you frequently overdraft, however, your bank might be less willing to look the other way.

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Having an overdrawn account can cost you a bundle. To avoid overdraft charges, consider developing better financial habits and sticking with a budget to ensure your account stays out of the negative. Not only will you dodge unnecessary fees, but you’ll also have peace of mind knowing your account’s in good standing.

Editorial Note: This content is not provided or commissioned by the bank advertiser. Opinions expressed here are author’s alone, not those of the bank advertiser, and have not been reviewed, approved or otherwise endorsed by the bank advertiser. This site may be compensated through the bank advertiser Affiliate Program.

About the Author

Michael Keenan is a writer based in the Kansas City area, specializing in personal finance, taxation, and business topics. He has been writing since 2009 and has been published by Quicken, TurboTax and The Motley Fool.

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