Definition
A fee a bank charges when it pays a transaction even though your account does not have enough money to cover it.
What it means
An overdraft happens when you spend more than the balance in your account and the bank covers the shortfall. The bank then charges an overdraft fee, often around $35 at many large banks, although some banks have lowered or dropped these fees. If the bank refuses the payment instead, it may charge a non-sufficient funds (NSF) fee. Under the federal Regulation E, a bank cannot charge overdraft fees on ATM withdrawals or one-time debit card purchases unless you first opt in. Checks, recurring debit payments and automatic bill payments can still trigger fees without opting in. Ways to reduce the risk include low-balance alerts, linking a savings account for transfers, and keeping a small cushion. Each bank's fee schedule lists its exact charges and daily limits.
Example
If your balance is $40 and you pay a $60 bill, the account goes $20 negative. With a $35 overdraft fee, you now owe the bank $55.
Illustrative numbers only. Your situation will differ.