Sooner or later, it happens to most of us: You wind up with one of life’s financial “uh-oh” moments, namely a negative bank balance. Somehow you lose track of exactly how much money you have in your account, and you dip into the red. Maybe you forget about a check you wrote, or perhaps you thought a check cleared but it actually hadn’t and you made a withdrawal against it. Alas, there are any number of reasons where you can come up short and your account goes into minus territory.
Key Points
• A negative bank balance occurs when an account goes below zero, also known as an overdraft.This happens when payments exceed the funds in the account, resulting in a debt.
• Negative balances can lead to overdraft fees, declined transactions, account closure, and credit impact.
• Ways to avoid negative balances include monitoring the account, setting up alerts, and linking accounts for overdraft protection.
• Fee-free banking options are available that do not charge overdraft fees, minimum balance fees, or monthly fees.
What Is a Negative Bank Account Balance?
Your account becomes negative when the balance goes below zero. It’s also called an overdraft. This occurs when you make payments that you don’t have enough money in the account to cover. If the bank accepts the payment, your account incurs a debt, making your balance negative.
To help you visualize this, imagine you have $500 in your account, and you write a check for $515, because you thought you had a balance of $600. If the bank pays the $515, you end up with an account balance of minus $15. That’s the difference between how much money you had in the account and how much the bank paid the person that cashed your check. As you see, the bank did you a favor by making up the difference.
What Makes a Bank Balance Negative?
Your balance goes negative when you have withdrawn more than you have in your account. When this happens, if you wrote a check, it will bounce, or be returned — unless you have overdraft protection. In that case, the bank will pay the difference, and you will be charged a fee called an overdraft fee. Understand that you have to opt in to overdraft coverage for ATM and debit-card transactions, but your bank may provide the coverage automatically on other transactions.
This kind of coverage means you can avoid the inconvenience and embarrassment of a check bouncing. However, the fees do add up! While overdraft fees vary by bank, according to Experian you can expect to pay about $35.
Here are some of the more common ways that a negative bank balance can occur.
Miscalculation/Mistakes
Managing money is not without challenges. It doesn’t take much to end up with a negative balance. Don’t beat up on yourself if it happens. You have plenty of company. According to statistics from the Center for Responsible Lending , banks collect more than $11 billion in overdraft-related fees in a recent year. Overdrafts can happen easily with miscalculations and mistakes. These are the most basic errors — say, getting the math wrong on how much is in your account, or forgetting about an automatic dedication that hits and takes your balance down lower than you believed it to be.
Multiple Ways to Withdraw From an Account
Which brings us to the fact that there are many ways to withdraw money from your account. This can create various opportunities for things to go awry. With all that’s going on in your life, it’s possible you’re not exactly sure what checks you’ve written have been cashed and what incoming checks have cleared. You may unwittingly make a payment or ATM withdrawal thinking you’re good, but discover you’re certainly not. Or perhaps when you’re calculating in your head how much you have, you forget about the money taken out through one of your monthly automatic bill payments. It’s a lot to keep track of, for sure. That’s why it’s always good to monitor your checking account regularly so you can see exactly where you stand.
What Happens if Your Bank Account Remains Negative?
For sure, it’s bad news when your account is in negative territory. Here are some of the issues it triggers.
Overdraft Fee
An overdraft fee of about $35 may be assessed when you go into the negative-balance territory. Or the bank could also decline the transaction and charge you a non-sufficient funds (or NSF) fee. This is sometimes called an insufficient funds fee, and it is typically the same amount as the bank’s overdraft fee. The damage doesn’t necessarily stop there. Say your rent check bounced. Your landlord might charge you a returned check fee. Similarly, if you’re out shopping and try to swipe your debit card to buy something, the retailer might hit you with a fee for a declined purchase if you don’t have enough funds to cover the transaction.
We all want to avoid bank fees, and that includes overdraft charges; they’re simply money wasted. In that way, it’s good motivation not to get in the habit of overdrawing your account. Know too that negative bank balances may even lower your credit score.
Account Closure
What happens if you don’t pay an overdrawn account? If you don’t fix your negative balance by depositing money into your account, or if you overdraw your account so often the powers that be at the bank raise their eyebrows, your days as a bank customer may come to a close. They can opt to shutter the account.
Credit Impact and Debt Collection
In the above scenario of an ongoing negative bank-account balance, consider this: Adding salt to the wound, the bank will likely notify a checking-account reporting company about your failings. They will keep the information in their records for up to seven years. Those negative marks on your record could prove problematic if you try to open another bank account within that time. You might get the thumbs down or you may have to settle for an account for those with not so stellar track records. In that situation, you’ll probably pay higher fees and you may have some restrictions, like being limited to how much money you can withdraw a day.
Also, a bank that closed your account because you had so many overdrafts might sell your debt to a collection company. If that company reports your unpaid balance to the credit bureaus, your credit score will head south. It will be tougher for you to get the credit you want somewhere down the road.
Differences Between Overdraft and Non-sufficient Funds
An overdraft fee is what a bank or credit union charges you when they have to cover your transaction when you don’t have enough funds available in your account. It’s typically about $35. In contrast, when a financial institution returns a check or electronic transaction without paying it, they can charge a non-sufficient funds fee. It’s usually the same amount as the overdraft fee they charge. The difference is, with a non-sufficient funds fee, the bank is not covering the shortfall; they are essentially voiding the transaction.
What to Do With a Negative Bank Balance
Fortunately, a negative bank balance is not a problem without solutions. You can take steps to get back on track. For one thing, put your debit card and checkbook away until you figure out what’s what with your account. You don’t want to make any more mistakes that will cost you more in fees. Remember to double-check your automatic payments. If you have an autopay coming up shortly, it may be best to halt it so you don’t overdraw again.
Compare Your Recent Statements
Determine what went wrong and triggered the negative balance. Look at your latest statement or go online to see the additions and subtractions to your account. Be sure that you are clear on what’s still outstanding; that is, what hasn’t been paid or received. Do the math. This will give you an idea of where you stand and how soon you may be back in the positive zone for your balance.
Deposit Money into the Account
Once you understand your situation, take action. Deposit enough money to ensure that you won’t overdraw again. Remember to include not only the money you need to bring your balance back into positive territory, but ideally put in enough to give yourself some cushion.
Request a Waived Fee
Your bank or credit union may have a sympathetic ear. Do make a request to have your fee waived. They may be feeling generous, particularly if this is your first offense.
Pay the Fees
If you knock on the door of fee forgiveness and you get a no, pay what you owe. If you don’t, you’ll just make your situation worse, meaning the bank could close your account, turn the matter over to debt collection, or take legal action. Know too that they might put the word out about your misdeeds to a checking-account reporting company, or a debt-collection company could spill the beans to the credit bureaus. While the bank may not close your account right away, taking action sooner rather than later is best.
Tips for Avoiding a Negative Bank Balance
The truth is, you can lessen the odds of this kind of trouble coming to pass and avoid overdraft fees and drama. Be proactive, and take advantage of technology. You can sign up with your bank to receive text or email alerts when your account balance reaches a certain low. Be fastidious about checking your bank account frequently. Downloading your bank’s app can allow you to do this easily and frequently online. At a minimum, you can check monthly if you get your statements via snail mail, but more often is probably better. Make sure you have fixed in your brain the dates that automatic payments are taken; set recurring calendar alerts if needed. Knowing when these are coming up can give you a window to run interference and halt it to avoid an overdraft.
When you’re reviewing your statements, make note of where your money is going. See if there are areas where you are overspending and make adjustments. Even if you’re cutting back a small amount of money, that’s cash that can go toward your emergency fund, which should have a few months’ worth of expenses in it — and can help when an overdraft seems to be looming.
Also find out what overdraft protection your bank offers. It could be that you can link a savings account to your checking which can be tapped to cover overdrafts. It will likely cost you a fee for that transfer, but hey, it’s not likely to be as stiff as the $35 overdraft fee. Your bank might allow you to link a credit card (watch out for high interest rates here) to your checking account or to borrow from a line of credit. Know your options. While you don’t want overdrafts to be a regular occurrence, you do want to be protected in case they crop up.
The Fee-Free Way to Bank with SoFi
You’ve just heard a lot about the kind of fees banks can charge. Wouldn’t it be nice to avoid all those extra charges? With SoFi Checking and Savings, you can! We offer no overdraft fees, no minimum balance fees, no monthly fees — and 55,000+ fee-free ATMs within the Allpoint® Network. Those are just a few of the advantages of banking with us.
FAQ
Can I still use my debit card if my account is negative?
Maybe, if you’re enrolled in your bank’s overdraft coverage. But even if you can, it’s unwise. You’ll likely incur a fee for each payment you make from a negative account. It may be better to stop spending and top the bleeding. Know too, if you keep making payments from an overdrawn account, your bank could close your account.
How are non-sufficient funds different from an overdraft?
An overdraft fee is what a bank or credit union charges you when they have to cover a transaction that you made and didn’t have the money for in your account. In contrast, when a financial institution returns a check or electronic transaction without paying it, they can charge a nonsufficient funds (NSF) fee. It’s usually the same amount as the overdraft fee they charge; typically, around $30 or so.
How do I avoid having a negative bank account?
Sign up for email alerts and texts for when your account reaches a certain low figure; monitor your bank account online; link your accounts to cover for one another; and consider signing up for overdraft protection.
Can you go to jail for a negative bank balance?
It is highly unlikely. Overdrawing your bank account is not a criminal offense in and of itself. However, if additional fraudulent or criminal activity is involved, it might be.
How long can you have a negative bank balance?
Each bank has its own policy. While your bank account won’t be closed immediately if you have a negative bank balance, resolve the issue as soon as possible.
Photo credit: iStock/kupicoo
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