Question
What is an overdraft fee?
Answer
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Audrey
Professional · Tutor for 6 years
Answer
An overdraft fee is a charge imposed by a bank or credit union when an account holder's transaction exceeds their available balance, resulting in a negative account balance.
Explanation
An overdraft fee is a financial penalty charged by a bank or credit union when a transaction (such as a check, ATM withdrawal, or debit card purchase) exceeds the available balance in a customer's checking or savings account. The bank covers the amount of the transaction that goes over the available funds, effectively allowing the account to go into a negative balance, but in return, they charge an overdraft fee. This fee compensates the bank for the risk of lending money to cover the shortfall and for the service of paying transactions that the account holder does not currently have the funds to cover. The specifics of how overdraft fees are applied, including the amount of the fee and any daily limits, can vary significantly between different financial institutions.