Legal Definitions - O/D

O/D or OD stands for Overdraft.

An overdraft occurs when a financial institution allows a transaction to be completed, even though there isn't enough money in the account to cover the cost. This results in a negative balance in the account, meaning the account holder owes the bank money. Banks typically charge fees for overdrafts and require the negative balance to be repaid.

• Example 1: Personal Checking Account

  Maria has $100 in her checking account. She uses her debit card to purchase a new pair of shoes for $120. Her bank, having an overdraft protection policy, allows the transaction to complete. Maria's account balance then becomes -$20.

  How this illustrates the term: Maria's account went into an overdraft because the bank permitted a transaction that exceeded her available funds, creating a negative balance that she now owes the bank.

• Example 2: Business Expense Payment

  A small graphic design studio, "Creative Canvas," has $800 in its business checking account. The owner, Alex, writes a check for $1,000 to pay for new design software. Before the check clears, no new deposits are made. The bank processes the check, and the studio's account balance drops to -$200.

  How this illustrates the term: The studio's account experienced an overdraft because the bank honored a payment that was greater than the available funds, leading to a negative balance for the business.

• Example 3: Automated Bill Payment

  John has an automatic monthly payment set up for his internet bill, which is $75. On the day the payment is scheduled, his checking account only contains $60. His bank processes the payment as usual, and his account balance becomes -$15.

  How this illustrates the term: John's account went into an overdraft because the automated bill payment was processed despite insufficient funds, causing his account to have a negative balance.