What is an overdraft?

An overdraft usually refers to a checking account where the amount of checks presented to the bank for payment exceeds the amount on deposit. When this occurs we say that the checking account customer has overdrawn its account. The overdraft means that the bank's records indicate a negative checking account balance.

A checking account overdraft will likely result in bank fees for either 1) returning the checks to the endorser or payee so that the account balance will not remain negative, or 2) not returning the checks and allowing the checking account balance to remain negative. If checks are returned, they are often noted as being returned for insufficient funds or not sufficient funds (NSF). The bank of the check endorser is also likely to charge its customer a fee for processing the returned checks.

Many companies write checks for more than the amount on deposit in their checking accounts but may not experience a bank overdraft. The reason is the time delay between writing checks and having them clear the checking account on which they are drawn. Taking advantage of this time delay and not having an overdraft is referred to as playing the float.