Can I Switch Bank Accounts if I Have an Overdraft?

By Timothy Moore · June 21, 2022 · 8 minute read

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Can I Switch Bank Accounts if I Have an Overdraft?

If you have an overdraft at your current bank account, you may wonder if it is still possible to switch to another bank. While you can switch bank accounts with an overdraft, it will cost you. What’s more, you may be limited to second-chance checking accounts or “no-overdraft” accounts that offer limited services and charge a monthly fee.

That’s because checking account reporting companies like ChexSystems and Early Warning Services monitor your banking activity and produce reports about your habits, much like a credit report. When you overdraw an account or have unpaid fees, these agencies will likely add that to your report, indicating to banks and credit unions a certain level of risk associated with taking you on as a customer. And if a bank closes your account because of an overdraft (called an “involuntary closure”), it may portray you as an even larger risk.

In this guide, you’ll learn the answer to “Can I switch bank accounts if I have an overdraft?” and other important insights. What’s ahead:

•   Is it possible to switch your bank account after overdrafting?

•   What happens when you overdraft?

•   How to find a new bank account?

•   What ChexSystems is and how to improve your banking record.

Is It Possible to Switch Your Account After Overdrafting?

Here’s the answer to the question, “Can I switch bank accounts with an overdraft?”: Yes, you can make a change, though your options may be limited. And even when you switch, you are still responsible for paying off your negative balance in your old bank account.

Because of the potential negative impact on your checking account report, it is a good idea to pay off your negative balance with your bank before switching, if at all possible. Doing so may make it easier to find a new checking account.

What Happens When You Overdraft

When you overdraft on your account, your bank may assess certain overdraft fees, depending on the terms and conditions of your account and what you have opted into. You will then be responsible for paying back the overdrawn amount plus the fee.

Agencies like ChexSystems and Early Warning Services will note this on your report. Your banking report is separate from, but similar to, the credit report that is compiled by the big three agencies: Equifax, Experian, and TransUnion. While a credit report tracks how responsibly you use credit (paying bills on time, how much debt you have), your banking report chronicles activity like bounced checks.

If you maintain a negative balance and do not pay the fees, the bank may close the account for you. This situation, when you have an involuntarily closed account on your checking account report, can make it much more challenging to convince a bank to let you open a new account.

Remaining bank account fees can even go to collections. In other words, if you avoid paying off the negative balance now, you may one day have to deal with a debt collector.

Recommended: Does Switching Bank Accounts Affect Credit Score?

How to Find a New Bank Account

If you want to switch bank accounts with an overdraft, perhaps because the current bank’s overdraft policy is not ideal for your situation, you have two options:

•   Pay back the negative balance and any overdraft fees. Doing this will allow you to close the account on your terms. It will also minimize any damage done to your checking account report with ChexSystems and Early Warning Services. Then you can assess what kind of bank account would work better for your needs.

•   Look for a second-chance checking account. If you cannot pay back the fees and negative balance right now, the bank may eventually close the account for you. With unpaid fees and potentially an involuntary closure on your report, you may find yourself limited to second-chance checking accounts, sometimes called “no-overdraft” accounts (more on these, below).

Pay Back the Overdraft

If you are able to resolve any overdrafts before closing your account, you will likely find it easier to open a new checking account. Without major blemishes on your report, the door will be open to better accounts, potentially even accounts that offer cash back rewards or pay interest.

In addition to offering interest and/or cash back, higher-caliber checking accounts often offer overdraft coverage with no fees to keep you from falling back into your overdraft habit.

There are other reasons to repay that overdraft on your bank account. With a stronger checking account report, you can typically find that doors open to a variety of banking products that reward you for your responsible behavior. For instance, you might be eligible for rewards checking accounts with no fees and protection from overdraft as well.

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Look for a Second-Chance Checking Accounts

However, if you are unable to pay off the negative balance or if your account was already involuntarily closed, you are not out of options. Some banks and credit unions do not use ChexSystems and Early Warning Services reports, which can make it easier for you to open an account.

You can often find second-chance checking accounts specifically designed for consumers who have been rejected by major banks because of their checking account reports. Such accounts often come with monthly fees that you cannot waive, and they might have additional requirements. Note: These accounts typically do not allow you to overdraft. Some banks will convert these accounts into standard checking accounts after a year or two of good banking behavior.

As an alternative, certain banks and credit unions may offer a prepaid card that operates like a debit card. You can load the card with money to spend. But unlike prepaid gift cards, these cards allow you to receive direct deposits and fund them with checks.

How You May Improve a ChexSystems Report

If you want to potentially improve your ChexSystems report, it’s important to know that negative behavior can linger for a number of years. ChexSystems, Early Warning Services, and any other agencies that report on consumer checking accounts cannot keep information that is older than seven years; some companies remove information after five years.

But you don’t just have to wait for time to pass to improve your checking account report. Here are a few things you can do to clean up your report now:

•   Dispute incorrect information. First and foremost, you can request one free ChexSystems report every 12 months (or any time you are denied an account). Review this report to ensure the information is correct, and dispute any discrepancies with the financial institution and the reporting company. If you have been a victim of bank account fraud, this is especially important; it’s wise to clear up these issues as soon as possible.

•   Pay off unpaid balances. If you have unpaid balances with a bank or credit union that are showing up on the report, you can pay these off, then request that the bank update the information with the reporting company.

•   Take advantage of your no-overdraft account. While you are waiting five to seven years for negative entries to fall off your report, it’s a good idea to avoid any activities that could lead to further bad marks. Utilizing a no-overdraft checking account, though it might carry monthly fees, can be a good way to ensure that you don’t accidentally overdraft again. In the same way you might build credit over time, you can establish a banking history that is mostly free of bad marks.

The Takeaway

Switching bank accounts if you have an overdraft is possible, but it can have long-term effects on your personal finances. If at all doable, restoring balances to $0 and paying overdraft fees before switching accounts is a good idea. It will help you access more flexible banking options at other institutions. However, if you can’t pay the outstanding balance, you might still be able to switch to a second-chance checking account. These accounts are designed for those whose checking account reports contain instances of risky banking activities and can help you build back good banking behavior after overdrafts and the like.

If you are looking for a checking account that offers overdraft coverage with no fees, consider opening a new SoFi Bank Account. When you open Checking and Savings with direct deposit, you’ll enjoy an amazing APY, and access to your paycheck up to two days early. With a minimum monthly direct deposit of $1,000, you also get no-fee overdraft coverage.

Better banking is here with up to 4.20% APY on SoFi Checking and Savings.


Can you close a bank account if you owe an overdraft?

You typically cannot close a bank account if you owe an overdraft. The bank, however, can choose to close your account to protect itself against further risk. This is called an involuntary closure and has a negative effect on your checking account report.

Can you close a bank account with a negative balance?

Generally, you can not close a bank account with a negative balance or unpaid fees. You will need to pay this money back to the bank or credit union before you can close the account.

Can you go to jail for a negative bank account?

A negative or overdrawn bank account is not a criminal offense. However, your account could be sent to collections, and unpaid balances will show up on your checking account report, which could make it difficult to open an account in the future.

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