It can be stressful to realize that you are spending more money than you have in your checking account. If you find yourself in this situation, you may be worried about what will happen next.
Learn more about how overdraft works and how negative checking account balances affect your financial situation. Plus, find useful tips that will help you avoid overdraft and overdraft fees in the future.
Overdrafts become negative if used beyond the balance available in your account. This happens when there is overdraft compensation, an agreement between you and your financial institution. With this protection in place, the bank or credit union may cover transactions that exceed the current account balance. This basically extends your short-term loan.
In exchange for overdraft compensation, you can usually pay an overdraft fee for each use of the service. (Your financial institution also expects you to repay the overdraft amount as soon as possible.) Overdraft coverage usually has preset restrictions, and financial institutions may still choose to reject certain transactions at their discretion.
Some financial institutions may offer overdraft protection. This behaves a little differently than overdraft compensation. Overdraft protection avoids negative balance by automatically transferring your money from a linked bank account (such as a savings account) or credit line. Some banks may still charge fees to use overdraft protection, but are usually much lower than overdraft fees. Other banks may offer this type of overdraft protection free of charge.
read more: How long will you lend your checking account?
Overdrafting a checking account can trigger some frustrating results. However, your exact experience depends on your bank’s policy and whether overdraft coverage or protection is in place.
This provides a brief overview of the possible consequences of checking your current account.
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Overdraft fee: If you choose to compensate for overdrafts, the bank will typically cover transactions that exceed the account balance (up to the limit). However, this coverage has a price. According to FDIC, overdraft fees are often around $35 per transaction, and multiple fees can increase quickly if not careful.
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Refusal transaction: If there is no overdraft scope or exceeds the overdraft limit, the bank can reduce transactions that exceed the account balance. Even if you sign up for overdraft coverage, the bank may refuse certain transactions at its discretion.
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Account closure: Consistent overdrafting or negative accounts can lead to account closures. Therefore, even if you have overdraft coverage, you should avoid overdrafting your accounts whenever possible.
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Debt Collection: If your bank closes your account while you still borrow money, it may send a negative balance to the collection agency. Collected accounts can remain on credit reports for up to 7 years, which can damage your credit score.
Overdraft fees can be summed and can have a negative impact on your financial well-being. Good news: There are several ways to avoid overdrafts. The following tips may be a good place to get started.
If you do not set up overdraft coverage, the financial institution may simply refuse transactions that exceed the available balance. This approach is worth considering if you are looking for ways to save on bank fees.
Potentially reduced transactions may be inconvenient, but that means you avoid overdraft fees. This is an important consideration if you are following a strict budget.
Overdrafts often occur due to excessive spending. However, planning your income, expenses, and expenses (aka budget) makes it easier to avoid these types of financial set-offs and the fees that come with them.
read more: A complete guide to budgeting for 2025
When creating your budget, it is important to learn how to deal with the due dates and payroll periods for bill payments. Some creditors can even have your due date changed. So, if you have a large invoice a few days before you receive your payment, if it’s difficult to maintain your budget, consider calling your creditor and asking them to move the due dates to the later of this month.
Consider setting up automated teller payments for your payroll or checking benefits to your checking account. Direct deposits can provide faster access to your money and will help you avoid overdrafting your account if an unexpected transaction occurs before you have time to deposit your next check.
Keep buffers in your checking account
Another way to minimize overdrafts is to store additional cash in your checking account, also known as a buffer or cash reserve.
Checking account buffers act as financial safety nets to protect you in several potential ways. Maintaining additional funds (over normal monthly expenses) in your account will not only help you avoid overdraft fees, but it will also help you cover unexpected emergencies and avoid minimum balance fees.
read more: How much does it cost to a checking account?
Many financial institutions provide customers with the ability to sign up for text or email bank alerts when the balance falls below a certain threshold. Setting a low balance alert will allow you to take action until your next salary arrives (probably by transferring money from your savings account).
When signing up for overdraft coverage through a bank or credit union, it is important to treat the service as a backup. Ideally, you should only rely on financial emergency overdraft coverage.
Once your account becomes negative and overdraft coverage begins, you may be charged a fee for each transaction your bank covers. These costs can be added soon. Additionally, overusing overdraft coverage can lead to major issues, such as account closures, if the situation becomes unmanageable.
Yes, you will need to pay it back to an overdraft. When you overdraft an account, you essentially borrow money from a bank or credit union to cover the transaction, even if it’s a few dollars. The money you borrow will be the negative balance in your checking account. In addition to these funds, financial institutions expect to repay the fees they charge for overdraft coverage.
An overdraft fee is a fee that a financial institution applies when spending more money than you have in your account, and the bank or credit union covers the transaction. In some cases, banks may transfer their money from a linked deposit account to cover the transaction and still charge overdraft fees.
A typical overdraft cost is around $35, but it varies from financial institution to financial institution. If you want to avoid overdraft fees, let your bank know that you want to opt out of overdraft coverage.
