What is Overdraft?

What is Overdraft?

Bank accounts and kids debit cards are great tools for teaching financial literacy for kids. But what happens when your child tries to spend more money than they have? Parents want to teach their children how to manage money responsibly and help them understand the consequences of overspending or going into debt. Help your kid learn how overdrafts work and what a bank can charge if they spend too much with a kids debit card or adult account down the road.

What is overdraft?

An overdraft occurs when a bank approves a transaction you don’t have enough money to pay for in your account. If you lose track of your bank account balance and accidentally overspend, your bank might still cover the charge and expect you to pay the difference back. An overdraft is a negative balance or debt, you owe the bank when you charge more to your account than you have funds to cover.

When do overdraft fees come up?

When you spend more money than you have, you owe a debt to the bank. Your bank can charge you fees on your debt according to your agreement as an account holder. Some banks charge overdraft fees per transaction or per day, and fee amounts vary widely depending on the bank. 

 

Overdraft fees can cause serious strain, especially if you’re already tight with your budget. The best way to avoid overdraft fees is to stay on top of your spending and build good money management habits. Teach kids how to manage money from an early age so they can avoid unnecessary debt while building financial literacy.

Are there overdraft fees on a kids debit card?

All banks have their own overdraft rules, and they can set their own fees for different accounts. Kids debit card accounts often come with overdraft protection and spending controls to ensure your child can’t spend more money than they have in their account. GoHenry offers spending controls, so parents can limit the amount kids spend per day as well as where and how kids spend their funds.

How does overdraft protection work?

Banks and financial institutions can offer different protections for account holders in case of an overdraft. The total amount of money a bank will cover in case of an overdraft will depend on your agreement, and some banks may waive fees in certain situations. Reading the fine print will help you understand how your fees are charged. Research what overdraft protection your bank offers and what fees you’ll pay in case of overcharging. Overdrafts can lead to unnecessary debt and show the importance of teaching financial literacy for kids from an early age. 

 

Read more financial articles about borrowing here.

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Written by Kristin Yarbrough Published Jul 29, 2022 ● 3 min. read