Overdraft - What is it?

An overdraft as the word mentioned over-draft means that you have over drawn on the monies available in your account. This means your account is in the red. Most countries have laws that penalizes a person when they overdraw their account. This is to prevent bad checks being written. Banks ever being so helpful and seeing an opportunity to make some money, sometimes have facilities to automatically “lend” you some money through what is called “overdraft protection plan” which allows you to overdraw a certain maximum amount. Obviously this is not a free service. Banks will charge interest on the overdraft amount plus other service charges.

On the other hand, without overdraft protection, your checks will bounce and you’d get on a blacklist somewhere. Mistakes do happen and there are costly. How much can an overdraft cost you?

Let’s see. Note that fees vary from bank to bank. Most banks charge a flat fee between $20 to $30 for EACH item they cover. And many set a dollar limit on the total amount your account may be overdrawn at any one time.

Let say that your bank covers overdraft up to a total of $300, including all the fees. In addition to that, most banks charge a daily fee around $5 a day - for EVERY day your account is overdrawn.

Let us use an example:

Let’s just say have only $15 in your account. You wrote a check for $25, used an ATM to get $40 cash, and used your debit card to buy groceries worth $30. The total for these 3 transactions is $95. Since you only have $15, your account is overdrawn $80 ($95 - $15 = $80). How much will your forgetfulness cost you?

Assuming you have an overdraft-protection plan and your bank decide to cover all 3 transactions. And since EACH of the 3 overdrafts will trigger a fee, you will now owe your bank the $80 that you spent, plus the 3 overdraft fees. If your overdraft fee is $25 per overdraft, you will owe your bank $80 + $75 (i.e. 3 x $25) = $155