What is an overdraft?

An overdraft occurs when a financial transaction, such as a check or withdrawal, exceeds the amount of money currently available in a bank account. When this happens, the bank typically allows the transaction to go through, resulting in a negative balance in the account. This service is usually provided with certain limits, which can vary based on the bank's policy or the account holder's arrangement with the bank. Understanding overdrafts is crucial for personal financial management, as they can incur fees and impact financial planning. Recognizing that overdraft impacts account management helps individuals avoid unexpected charges and manage their finances more effectively.