The Consequences of Overdrawing a Checking Account

The consequences of overdrawing a checking account, or having insufficient or non-sufficient funds (NSF) in your checking account depend 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.

If your checking account falls below a zero balance, it's called overdrawing your account. Overdrawing an account could happen accidentally, such as if you forget that you wrote a check to someone and they don't immediately deposit it. Learn more about the consequences of overdrawing a checking account.

Consequences of Overdrawing

Your bank may offer overdraft protection. This is an option that banks provide 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. 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.

Overdraft Protection and Fees

Whatever the circumstances surrounding your account overdraft, you may end up paying multiple fees for using these services. All these costs can add up quickly. 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.

Should You Opt In?

Federal regulations require that banks give customers the choice whether to opt in to overdraft protection programs. Your bank can't automatically enroll you in an overdraft protection 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 don't have overdraft protection and try to complete a transaction that you don't have funds to cover, it usually will be denied. If you try to take money out of an automated teller machine (ATM), that's an inconvenience.

If you've written a check and it bounces, the bank may charge you a non-sufficient funds (NSF) fee. In addition, the party receiving the bounced check may demand reimbursement for a returned-check fee.

Account Closures

Remember, overdraft protection (whether you have it on your account or your bank decides not to return your transactions) is meant to be used in emergencies only, like when you forget that you wrote that check.

Banks may close your account if you consistently have a negative balance or if you do not bring 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 also can visit your bank to get details on what happens if your bank balance is regularly in overdraft.

Debt Collection

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 to 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.

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 in your account. So you shouldn't have any difficulty knowing where you stand. If these aren't options, keeping accurate records will help you avoid an overdraft on 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 you can. 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 more likely you will make an overdraft. You may find it increasingly difficult to get your balance back to positive, which can result in more in fees.
• Request a fee waiver: Ask your bank if it can waive some or all of the fees. It's possible your bank will help you out, especially if you rarely make an overdraft.

The Bottom Line

Overdrawing your account can become extremely expensive. To avoid paying overdraft fees, the Federal Deposit Insurance Corp. (FDIC) recommends that you monitor your account balance regularly and link your checking and savings accounts, so you can cover a shortfall. 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, consider calling your bank to ask to have it waived, especially if it is your first overdraft. Add funds back to your account to cover the difference as soon as possible to avoid more fees.