What is an Overdraft Balance?

The term overdraft balance refers to a negative account balance occurring when a check or credit to an account exceeds the available balance. Overdrafts occur for numerous reasons such as errors made by the account holder or the bank or victimization during a robbery. The fees or interest associated with overdrafts can be costly if mistakes are repeated over time. An account holder may be subject to criminal prosecution in instances where the account is intentionally overdrawn numerous times.

The best way to prevent overdrafts is to keep accurate records. The most common reason an account becomes overdrawn is failure to regularly balance the account or inaccurate records concerning deposits and withdrawals. Banks will sometimes allow Automatic Teller Machine (ATM) or debit card withdrawals regardless of the availability of funds in an account, which is a situation that may be prevented through accurate record keeping. Electronic withdrawals are easy to forget and present a problem if not accurately recorded. An account holder may also float checks, which is a practice that involves knowingly writing a draft on an account with a negative balance hoping to make a deposit before the debit reaches the bank.

Sometimes errors can occur beyond the account holder's control or through the criminal activity of others that produce an overdraft balance. For instance, the banking institution may incorrectly credit a deposit to the account without the account holder’s knowledge, or it may credit an amount for a check in a larger amount than it was written for. Some bank accounts have fees associated with them, and the bank will debit these fees against the account, automatically creating a negative or overdrawn balance. An account’s ATM card or debit card may have been stolen, creating a large overdraft balance. Account numbers may be stolen through purchases made on websites without secure shopping carts.

Regardless of the reasons an account is overdrawn, there are consequences which can be serious and costly. An account holder who repeatedly writes checks for greater than the available balance and fails to make good on those drafts may face criminal charges. Depending on the banking institution, an account with an overdraft balance may be charged anywhere from $10 US Dollars (USD) to $40 (USD). Some banking institutions allow for a certain amount of overdraft balances before charging fees, while others charge for each item presented. Other banks may charge interest fees, which are based on a percentage of the amount overdrawn.