What is an overdraft fee?

An overdraft fee occurs when an account holder withdraws more money than they have available in their account, leading to a negative balance. The bank covers the shortfall, allowing the transaction to go through, but charges a fee for this service. This fee compensates the bank for the risk and administrative work involved in allowing the account to go into a negative balance.

In this context, the fee serves as both a penalty for the account holder and a means for the bank to manage the costs associated with such transactions. It’s important for account holders to be aware of their balance and understand potential fees related to overdrawing their accounts to avoid unexpected charges.