Checking accounts can have negative balances if account owners opt in to overdraft protection programs without fund transfer capabilities. Rather than having a check bounce when there are insufficient funds in the account, overdraft protection allows the bank to process a check, wire transfer, ATM or debit card transaction. But the consequences will cost the account owner.
Overdraft protection often requires a monthly fee. Using it will incur additional fees to facilitate fund transfers from a linked savings account, credit card or line of credit. In addition, banks may charge overdraft fees in non-linked accounts and extended overdraft fees if negative account balances are not funded within a few business days, along with high interest rates for line-of-credit transactions.
Federal regulations now require bank customers to opt in to overdraft-protection programs. Once they do so and a check, ATM, wire transfer or debit card is overdrawn – or there is a negative balance incurred from recurring bills automatically deducted from a protected account – the bank will cover the transaction and charge a range of processing fees.
Not opting in also has its costs: The transaction will usually be denied, the check will bounce and the bank will charge a non-sufficient funds (NSF) fee. In addition, the party receiving the bounced check may demand reimbursement for a returned check fee. On the other hand, if the customer does not opt in and the bank chooses to clear the transaction anyway, without sufficient funds, neither a NSF or overdraft fee can be charged.
To avoid paying NSF or overdraft fees, the FDIC has two recommendations: Monitor your account balance, either electronically or manually, and link your checking and savings accounts so a shortfall is covered through an overdraft-protection program.