Even if you regularly peek at your bank balances online, it is possible for your account to accidentally fall into a negative balance. This is called overdrawing your account. This may happen if you forget about writing a check to someone who doesn't immediately deposit it. A debit card transaction may not have cleared quickly, and your balance was larger than it should have been. Or, a deposit could have been delayed, leaving you with insufficient funds to cover your withdrawals.
Whatever the reason, the consequences of having insufficient or non-sufficient funds (NSF) in your checking account depend entirely on your bank's policies. Whether you opted into overdraft protection or your bank covers you with a linked savings account, you may or may not be charged a fee for dipping into a negative balance.
- An overdraft occurs when your account falls below $0.
- Your bank will let your account become negative if you have overdraft protection or may make one-time exceptions but may charge you for every transaction.
- Federal regulations require bank customers to opt-in to overdraft protection programs.
- Your bank may close your account and send you to collections if you're always in overdraft and/or don't bring your account up to date.
- Monitoring your account closely and linking your checking account to a backup savings account can help you avoid overdraft fees.
Consequences of Overdrawing
Your bank may offer overdraft protection. This is an option that banks offer to their customers. It acts as an insurance policy of sorts, which allows transactions to go through even if you don't have money in your account up to a certain limit. It's like a short-term loan so, depending on the bank and the type of account and features you have, you may be charged a fee and/or interest for using the service.
In some cases, your checking account can be linked to another account. If your balance goes into overdraft, the funds are transferred automatically to your checking account to cover the difference. In other cases, the bank won't return the transaction and process it, which means you'll be charged fees until you deposit money to cover the difference.
If you overdraw your account, there is a very good chance you'll have to pay fees. Remaining in overdraft can result in heavier consequences, such as having your account closed.
Overdraft Protection and Fees
Whatever the circumstances surrounding your account, you may end up paying multiple fees for using these services. Your bank may charge you in the following scenarios:
- A fee for each transaction until your balance is restored or each time it transfers money from your backup savings account to your checking account.
- There could also be a monthly service fee and daily fees for each day your account is negative.
- If a check bounces, you may have to pay a returned check fee. All these costs can add up quickly.
Should You Opt-In?
Federal regulations require bank customers to opt-in to overdraft protection programs. This means that your bank cannot automatically enroll you when you open an account. While these programs may seem like a safety net, they can result in an avalanche of fees.
Not opting in also comes at a cost. If you do not have overdraft protection and try to complete a transaction that you do not have funds to cover, it will usually be denied. If you try to take money out of an automated teller machine (ATM), that's an inconvenience. But if you've written a check and it bounces, the bank may charge you an NSF fee. In addition, the party receiving the bounced check may demand reimbursement for a returned check fee.
The average overdraft fee in the United States as of 2020.
Remember, overdraft protection (whether you have it on your account or your bank decides not to return your transactions) is simply meant to be used in emergencies only, like when you forget that you wrote that check.
Banks may close your account if you consistently find yourself in a negative balance or if you dip below $0 and stay there without bringing your account up to date. Your account's terms and conditions outline the consequences so it's a good idea to take a look at the disclosure. You can also visit your bank to get details on what happens if your bank balance is regularly in overdraft.
If your bank closes your account, you're not out of the clear. You'll get a notice about the action. You'll also be notified of the outstanding balance, which you'll have to pay. It's just like a loan—your bank allowed your transaction(s) to go through by lending you when you didn't have it.
The notice should tell you how to rectify your account and what happens if you fail to repay it. In most cases, the bank will try to collect the balance itself. When all else fails, you may be sent to a third-party collection agency. And in some cases, it may be documented on your credit history, which will affect your credit score and any future attempts to get credit.
Some banks completely eliminated overdraft fees, including Capital One, Ally, and a number of smaller banks and credit unions. These institutions offer other options, such as automatic transfers, grace periods to cover negative balances, and declining transactions if there are insufficient funds in a customer's bank account.
What to Do if You Overdraw
Mobile banking makes it easy to keep up with your banking activity and your account balance. And many banks now notify you when you've reached a certain threshold on your account. So you shouldn't have any difficulty knowing where you stand. If these aren't options, keeping accurate records will help you keep on top of your account.
But life happens and there may be times when your balance does, in fact, go into the red. So what do you do? There are several things you can and should do when you've overdrawn on your account.
- Make a deposit. If you have money in another account, make a transfer. Bring the account into a positive balance or as close as possible as quickly as possible. It may keep the fees at bay and may show the bank that you're trying to make things right.
- Don't use your account. The more you use it, the deeper you'll be in the red. You may find it harder to get your balance back above $0. And that may mean more in fees.
- Check with your bank to see if it can waive some or all of the fees. You don't know if you don't ask, right? There's a very good chance your bank will be more than happy to help you out, especially if it's a rare occurrence.
How Much Are You Charged for Overdrawing a Checking Account?
The amount charged for overdrawing a checking account depends on the bank. The national average in 2020 was $33.47 although charges can be higher. Account-holders may also have to pay additional fees on top of the overdraft charge if their accounts dip into a negative balance. Some banks, though, eliminated overdraft fees altogether and offer other options to their banking clients.
How Can I Stop Overdrawing My Checking Account?
There are several things you can do to ensure your checking account is never overdrawn. Check your balance regularly and keep updated records on transactions and pending withdrawals. Sign up for account transaction and balance alerts so you know where you stand. You can also link your account with another one so if you are overdrawn, the funds are transferred automatically to bring you up to date. If your account is overdrawn, don't use it and replenish the balance immediately to avoid going further into the red.
Can You Get in Trouble for Overdrawing Your Checking Account?
You can't get in trouble for overdrawing your account, especially if it rarely happens to you. You may encounter some difficulty if you are always overdrawn or just don't bring your balance up to date. Your bank may close your account and may send you to collections until you repay the balance.
The Bottom Line
Overdrawing your account can become extremely expensive. To avoid paying overdraft fees, the Federal Deposit Insurance Corporation (FDIC) recommends that you monitor your account balance regularly and link your checking and savings accounts, so a shortfall is covered through an overdraft-protection program. (This may cost money, but it is likely to be less than paying overdraft fees.)
Bank apps make it convenient to keep tabs on your balance, and many banks offer notifications such as text reminders when your balance is low. If you do get hit with an overdraft or returned check fee, and it is the first time, it is worth calling your bank to ask to have it waived. Either way, add funds back to your account to cover the difference as soon as you can, which can help prevent fees from spiraling.