Checking accounts can have a negative balance if the account owner has overdraft protection. Rather than having a check bounce, which occurs when there are insufficient funds in the account, an overdraft allows the bank to process a check or debit card transaction.
However, this service is not provided free of charge. There are bank fees attached, which, along with the overdrawn amount, are deducted immediately from your next deposit. According to a 2014 Pew report, 84% of banks charge overdraft fees for ATM or debit card transactions. This study is based on documents from 45 of the nation's biggest banks in the United States, which represent around 66% of the country's deposits. The average fee was $35.
In 2010, federal regulations took effect, giving bank customers a choice whether to opt in to an overdraft program. However, if the choice is made to have this protection, banks can charge you a fee to process your debit card or ATM transaction if you do not have enough funds available in your checking account.
If a check is overdrawn, or there is a negative balance incurred from recurring bills automatically deducted from your account, a bank can cover the transaction and charge you an overdraft fee. Otherwise, the bank will likely charge a nonsufficient funds (NSF) fee, and the party who received the bounced check may also pass along the returned check fee. On the other hand, if you have not opted-in and the bank clears your transaction without there being sufficient funds, an overdraft fee cannot be charged.
To avoid paying overdraft fees, the FDIC has two recommendations: monitor your account balance, either electronically or manually, and link your checking and savings accounts so any shortfall is covered.