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.
Get up to $250 towards your holiday shopping.
Open a SoFi Checking and Savings Account with direct deposit and get up to a $250 cash bonus. Plus, get up to 4.60% APY on your cash!1
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.
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.
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.
SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2023 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
The SoFi Bank Debit Mastercard® is issued by SoFi Bank, N.A., pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
SoFi members with direct deposit activity can earn 4.60% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a deposit to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate.
SoFi members with Qualifying Deposits can earn 4.60% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant.
SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.60% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.
SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.
Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.
Interest rates are variable and subject to change at any time. These rates are current as of 10/24/2023. There is no minimum balance requirement. Additional information can be found at http://www.sofi.com/legal/banking-rate-sheet..
Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.
Photo credit: iStock/Professor25