Financial Dictionary -> Banking -> Overdraft

Overdraft is the amount of money by which a payment exceeds the deposit in the account used for the payment. For example if you have $2,000 dollars in your checking account and you try to buy an expensive TV costing $2,200 with your debit card an overdraft occurs, because you don't have enough money to pay for the TV.

If you have an overdraft agreement with your bank for an overdraft protection and you don't go over the agreed overdraft amount the bank will charge you pre-determined interest on the overdrawn funds. However if you go over the agreed overdraft amount the bank might charge you higher interest rates and additional fees. The checking account overdraft works very similarly to a line of credit.