A cash overdraft occurs when a debit card is used to withdraw money from a checking account, or to make a purchase, and there are insufficient funds to cover the charge. If the purchase or withdrawal goes through, this will create an overdraft on the account and lead to a negative balance, which often comes with other significant bank fees and penalties. A cash overdraft may be prevented if the ATM or the store declines the card, but this does not always happen.
Typically, a cash overdraft carries a heavy overdraft fee. Sometimes banks will automatically charge this overdraft fee to the account, which will compound the problem as the negative balance continues to increase. Customers who continuously overdraw their accounts may find that they face legal penalties, or that their accounts are closed by the bank. Many banks offer overdraft protection, either for free or for a small fee, to prevent this from occurring due to a cash overdraft or a bounced check. This is usually done by using a second account as a "backup," such as a credit card or a savings account.
Now that many debit cards may be used like credit cards in stores, a cash overdraft is easy to incur, especially if one carries a fairly low balance month to month in a checking account. They often occur when one uses a debit card for a purchase, or even multiple purchases, then forgets to write that amount in the checkbook with all the other checks. If this happens multiple times in a short enough period, it will not be long before a cash overdraft occurs. A debit card may or may not be declined at a store, even if it is already overdrawn. It is important to quickly deposit funds in an overdrawn account to prevent any other outstanding checks or debits from bouncing.
Some people use a few tricks to prevent a cash overdraft from happening. Creating a "buffer" in a checking account is a great way to do this; for instance, place an extra $100 or $500 in the account, but don't write it in the checkbook. This way, even when funds get low, this buffer may be able to help overdrafts from happening. Another good practice is to save all receipts, then at the end of the day or every few days write them in the checkbook. In addition, using cash as much as possible, rather than a debit card, is a good way to prevent overdrafts as well as to maintain a clear picture of how much money one actually has.
