The costs of a negative bank account and how to avoid them

Man using cellphone to look up what is a negative bank accountImage: Man using cellphone to look up what is a negative bank account

In a Nutshell

If you overdraw your checking account, it could have a negative balance, and it’s likely to cost you a lot in bank fees. Keeping enough money in your account could help you avoid overdrafts and ensure you never have a negative bank account.  

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If you have a negative bank account, that means you’ve taken out more money than was available in the account.

Letting an account go negative can be costly, because banks charge fees when this happens. And your bank could close your account if it stays negative for too long.

But you can take action to prevent a negative bank account. For example, you can opt out of debit card and ATM overdraft coverage so that your card simply gets declined if you don’t have enough funds. Or you can link your checking account to a savings account that can cover the difference if you come up short.



What is a negative bank account?

You have a negative bank account, or overdraft, when your account balance is less than zero. This happens when you try to make a payment that’s larger than the amount of money in your account. If the bank allows the payment to go through even though you don’t have sufficient funds to cover it, your account becomes negative.

Let’s say you have $100 in your checking account, and you write a check for $115. If the bank allows this payment, you end up with an account balance of minus $15 because that’s the difference between how much money you had in the account and how much the bank paid the recipient of your check. Essentially, the bank is lending you money to make up the difference.

Why is my bank account negative?

You can end up with a negative bank account for many reasons. You may simply lose track of how much money is in an account and think you have a higher available balance than you actually do. Or you might deposit a check and then make a payment right away, before the funds are available in your account.

Miscalculations and mistakes can happen

You could forget about a payment you previously scheduled or a purchase you made earlier in the month. You might incorrectly assume that a withdrawal won’t be processed for a few days and that a deposit will clear in the meantime.

And you can accidentally withdraw too much if you make a mistake when writing a check.

If you have more than one account at the same bank, confusion about which account you’re using can also lead to an overdraft. If you overdraw one account, your balance on that account will go negative even if you have more than enough money in another account to cover the payment, unless you arranged with the bank beforehand to transfer money between accounts in situations like this.

More than one way to overdraw an account

Writing a check is only one way to create an overdraft. You can also get a negative balance from an ATM transaction, electronic payments (including automatic or scheduled payments), taking out money at a bank branch or using a debit card, among other reasons.

What are the consequences of a negative bank account?

Fees

If you write a check or make some kinds of electronic payments that cause your account to go negative, your bank can charge you a fee for each overdraft. And if you’ve agreed to your bank’s overdraft coverage, the bank can also charge you a fee for each ATM withdrawal or debit card payment that results in a negative account. If this keeps happening, you may have to pay a significant amount in overdraft fees. You may also owe other fees if you don’t correct the negative balance right away.

Account closure

If you decide you want to close your bank account while it’s negative, the bank could refuse and ask you to pay the balance first.

But banks don’t keep negative accounts open indefinitely. If you overdraw an account too many times or let an account stay negative for too long, your bank will likely close the account. Then, the bank can notify a checking account reporting company, which keeps the information on a record about your banking history for as long as seven years.

Credit impact and debt collection

Banks look at this record when you apply for a new checking or savings account. They may not agree to open a new account if they see an involuntary closure on your bank account history. Or, they might allow you to open a second chance account but charge you high fees and place restrictions on it. For example, you might be allowed to deposit only certain kinds of checks, like cashier’s checks, or there might be a stricter limit on how much you can withdraw each day.

And a bank that closed your account for too many overdrafts could sell your debt to a collection company. That company might report your unpaid balance to the credit bureaus, which could lower your credit scores and make it harder to get approved for credit in the future.

What’s the difference between an overdraft fee and a nonsufficient funds fee?

Financial institutions charge an overdraft fee when they cover a transaction even though you didn’t have enough money in your account. On average, overdraft fees range from $31 per overdraft at smaller banks and credit unions to $34 at bigger banks.

When a bank or credit union returns a check or electronic transaction without paying it, they can charge a nonsufficient funds fee. The NSF fee is generally the same amount as an overdraft fee. But the bounced payment could trigger additional fees from the payee.

What should I do if I overdraw my account?

If you’ve overdrawn an account, don’t make any more payments from that account until you correct the negative balance by depositing money in the account. Continuing to withdraw money from a negative account would put it further in the red and cause you to rack up more fees, making the problem worse.

Check if you have any automatic payments that are about to go through so you can halt them before they overdraw the account again.

Next, take these steps to balance your account so you understand how much money you need to bring the account back to a positive balance.

  1. Compare your latest statement or your bank’s online ledger of account activity with your records of payments you’ve made or received.
  2. Check off each transaction that appears in the bank’s records, so that you’re left with the transactions that haven’t been processed yet.
  3. Note the balance at the end of the bank’s record. Then, subtract any payments you’ve made that haven’t been processed yet and any fees you’ve incurred that aren’t yet posted on the bank’s record, and add any deposits that are currently pending.

The result is an updated snapshot of your balance that tells you how negative your account is.

Finally, deposit enough money into your account to fully cover the negative balance, including fees.

Can I still use my debit card if my account is negative?

If you’ve enrolled in your bank’s overdraft coverage, you might be able to make debit card purchases even when your account balance is below zero. But it’s a very bad idea to do this.

You’ll likely be charged a fee for each payment you make from a negative account. Each transaction could cost you $35 or more in fees. And with every payment you make from an overdrawn account, you’re pushing the balance deeper into the red. The bank will expect you to deposit the total amount you owe and to pay all fees, and if you don’t settle this balance within a short time, it may apply more fees.

Depending on your bank’s policies, continuing to make payments from an overdrawn account could lead the bank to stop allowing payments or to close the account. If that happens and your payment doesn’t go through, creditors might charge you fees for bouncing your payment. And having an account closed by your bank will likely make it harder to open new accounts in the future.

Keep in mind that state laws typically prohibit writing bad checks or purposefully bouncing payments. If you’re aware that your account is negative and you try to make a payment from that account knowing it won’t go through, you could be charged with a crime in some circumstances.


Next steps: Tips to avoid a negative bank account

You can take steps to prevent your bank account from going in the red. Some options have both upsides and downsides.

Opt out of overdraft coverage

First, you could decide not to consent to overdraft fees. If you don’t agree to overdraft coverage, banks can’t charge you overdraft fees on ATM withdrawals and most debit card payments, although the bank will likely charge you fees for nonsufficient funds if you try to overdraw an account by check or online.

If you don’t consent to your bank’s overdraft fees, most debit card transactions that would overdraw your account probably won’t be approved, and your account stays in the black. But there are downsides. Creditors could impose fees if you can’t make a payment on time. And they might report missed payments to the credit bureaus, which could lower your credit scores.

Your bank might offer overdraft protection programs that can help you avoid negative balances. For example, you might be able to link a savings account to your checking account so that the bank takes money out of your savings to cover overdrafts. You might have to pay a fee for each transfer from the linked account, but it’s likely to be less than the fee for an overdraft.

The bank may not notify you of such transfers, so it’s a good idea to monitor both your checking and savings accounts closely to make sure you aren’t using up too much of your savings. And this service only works as long as you have enough money in your savings account to cover the payment.

Your bank might allow you to link a credit card to your checking account or to borrow from a line of credit to cover payments that would overdraw your account. You’ll have to pay interest on the amount you borrow, and you could be charged a fee each time you use a credit line. But you may save money this way as long as your account doesn’t stay negative for very long.

Automate account balance alerts and direct deposit

You may be able to set up account alerts so that your bank sends you a text or email whenever your balance gets below a certain amount. Alerts can remind you to put more money in your account before you overdraw it or to stop making payments from the account when you’re low on funds.

If you’re running a negative balance because you aren’t making deposits often enough, you might consider signing up for direct deposit. This service automatically deposits your paycheck in the account you choose, and the money often is available on the business day after the deposit is made.


About the author: Sarah Brodsky is a freelance writer covering personal finance and economics. She has a bachelor’s degree in economics from The University of Chicago. Sarah has written for companies such… Read more.