Many of us have been there, which is not fun. You look at your checking account balance and see that it is negative. You don’t know how or when your account became overdrawn, but here is a guide to making it through the dreaded negative balance on your bank account.
Pewtrusts.org indicates that about 18 percent of Americans incurred overdrafts in the past 12 months, with three-quarters of those incurring a penalty fee. According to the research, most people need to gain more knowledge of the overdraft rules.
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Understanding a negative bank account balance
A negative bank account is when you spend more than your available balance in your checking or savings account.
You have a negative account or overdraft when your account balance is less than zero.
If you had $100 in your checking account and a transaction of $150 was processed, then your account would be $50 overdrawn or $50 in the negative. You have spent more than you have available, and your bank or credit union has covered the difference. Essentially you now owe your bank $50. Having a negative bank account balance is more complex than paying back the $50 to get your account back to a positive balance. Most banks charge overdrafts or additional fees to cover the transaction if you do not have enough money.
Why is your bank account negative?
To fix the problem, you have to get to the root of the problem. It can be a simple miscalculation: you need more money to cover the payment or spend more than you earn.
- You miscalculated something: A miscalculation is typically the most common mistake; a math error happens, or you may need to remember about a payment you set up.
- It might be an error: Ex: an ACH payment went through a few days early when you weren’t expecting it, or a charge was automatically withdrawn for a loan you’d recently paid off.
- You withdrew too much money: Sometimes the debit card will allow you to overdraft the account even if you don’t mean to. Overdrafting the account happens when you have overdraft protection, or your bank may make a one-time exception but may charge you for every transaction.
What happens when your bank balance is less than zero?
- Fees: Most financial institutions charge an overdraft fee for a negative bank balance. The average cost can range anywhere from $25 to $35.
- Account closure: Your bank can and will close your account if it is in the red for too long or if you are repeatedly negative.
- Debt collection: If you close a negative balance account, your bank will report you to a credit bureau.
- Your credit score may fall: If they report you to debt collectors, their actions will damage your credit scores, making it more challenging to get credit in the future.
Fees you might have to pay on a negative bank account
- Overdraft fees: An overdraft is the amount of money you have passed the zero balance in your account. Overdraft fees vary from bank to bank but typically are around $35 per transaction. If you were overdrawn by $10, you would owe the bank $45; the $10 you are overdrawn plus a $35 overdraft fee. Some banks will charge overdraft fees for each transaction, so your negative balance can add up quickly.
- Non-sufficient fund (NSF) fees: These fees are typically associated with insufficient money in your account to cover a purchase or payment. While overdraft fees generally are associated with debit card transactions, non-sufficient funds fees are applied when you do not have overdraft protection. These fees come from bounced checks or when you have auto-pay setup for specific bills and services but insufficient funds in the linked account. A bounced check is a term for a returned check due to insufficient funds in the associated account the check was written for. Some also refer to this as writing hot checks.
How your debit card and overdraft protection work
Almost all checking accounts come with the option to have some form of a debit card. A debit card is a way to use the funds in your bank account without needing to make an atm withdrawal. Many banks will offer an opt-in for overdraft protection when using your debit card. Overdraft protection will allow you to complete a transaction even if you do not have enough money in your account to cover the total amount of the purchase. Be aware that although it will still cover the transaction, there could be associated fees with overdraft coverage. If you opt out of overdraft protection, there are no extra fees, but the transaction will be denied if you do not have sufficient funds to cover a purchase.
How long can your bank account be negative?
Banks vary on the time they allow an account to stay negative before they take the following steps. Generally, it ranges from three to 31 days before an account is involuntarily closed. The closing of the account depends on factors such as how much the account is overdrawn, the relationship with the customer, and if they have been in contact with the bank. How many times prior the account has been in the negative could also become a factor.
Should you close a negative bank account?
It is usually best for your financial situation to never intentionally use a bank account that has a negative balance. In some cases, it would be better to overdraft the account than to take out a payday loan. Even if you have overdraft services on a negative bank account, each time you use the account, you add more overdraft fees and put yourself further in the red with your financial institution.
Pro tip: The most important step is to stop all transactions through that account. Stop all automatic payments until the account is no longer negative. Do not use that debit card. Otherwise, you’ll keep racking up fees. Almost 10% of bank customers, often low-income consumers, routinely spend more money than they have in their checking account and incur fees that average $34 each time they do it. If you fall into this group, sign up for a bank account that does not charge overdraft fees.
If you cannot fix your negative bank account, contact your financial institution and ask about options for closing your account. A closed account is better than an open one that’s continuously racking up fees for routinely having a negative balance. If your account is closed due to a negative balance, it could be reported to ChexSystems, an agency that maintains a report of your banking activity. This could make it more difficult for you to open new bank accounts in the future.
At that point, you’d need to open what’s known as a “second-chance” account.
READ MORE: Best “second-chance” bank accounts
How to fix a negative bank account balance
One could get their account out of a negative balance in several ways.
- Deposit funds: The quickest way to get an overdrawn account back to a positive balance is to transfer or deposit money into the account as quickly as possible. Depositing funds immediately will minimize any overdraft or NSF fees with your bank. Be sure to deposit enough funds to cover any negative balances and upcoming pending transactions.
- Request a fee waiver: Contact your bank and ask if any overdraft or non-sufficient funds fees can be waived. If this is a new account or your first time overdrawing your account, be sure to reiterate that to your bank. Be polite as you can, be patient, and be courteous. It can also express your gratitude should the fees be waived.
- Pay overdraft fees: If you can’t get your fees waived, it is best to pay them as soon as possible. You do not want to let a negative account sink further into the red to a point where you cannot dig yourself out. Consider it a temporary setback and a lesson on money management; get your expenses paid and move forward.
9 ways to prevent a negative bank account balance
Here are some tips and money management tactics to keep your account from going into the red.
- Turn off automatic payments: It is an excellent time to turn off automatic payments if your financial situation is walking the line between a positive and negative account balance. Most auto payment services do not check to see if you have enough funds to cover the billed amount. We often set up automatic payments but may ignore the date the funds are withdrawn from our account. By turning off autopay, you will get billed and know precisely how much you have in your account before you manually make a payment. In most cases, delaying payment would be better than having your account overdrawn.
- Use an app to monitor your balance: Many lenders now have mobile banking apps. These apps are great for setting banking notifications when money is deposited or withdrawn from your accounts. If you are not keen on mobile banking through your phone, these banks usually have an online banking option that you can monitor with your computer or another smart device. Get in the habit of checking your accounts online daily as a simple precaution. Not only can this help with staying ahead of negative balances, but it can also help you detect any fraud on your account sooner.
- Set up low-balance alerts: Setting up low-balance alerts for your bank account is an excellent way to keep your account out of the negative. You set a certain amount in your account; once your balance goes below that, your bank will send you a text, email, or phone call to notify you. For example, if your low-balance alert was set as $150, you will be notified once the balance is below this amount. Setting up an alert can help you monitor spending or deposit more funds into your account before hitting a negative balance.
- Use direct deposit: Direct deposit can be helpful by giving you direct access to your money instead of waiting for payday and having to cash your check or deposit it manually. Signing up for direct deposit will have your paycheck deposited directly into your chosen account. Be aware that if you use direct deposit and your account is overdrawn, the bank will automatically deduct any overdraft or NSF fees when your paycheck is deposited into your account.
- Link a savings account: Sometimes, you can link a savings account to your checking account. If your checking account becomes overdrawn, your bank can automatically move funds from your savings account to cover the difference. There may still be a small fee, but it would be less than an overdraft fee and keep your account out of the red.
- Pay with a credit card: You can avoid the penalty of paying for the hassle of overdraft fees or, worse, having your account closed due to negative balances. Consider moving funds to a bank where you have a credit card. Of course, this only works if you can qualify for a credit card.
- Set up a financial plan: Budgeting or visiting a non-profit debt management company may help you keep track of your earnings and help prevent overspending and overdraft issues. Setting aside funds for emergencies is another way to avoid overdrawn accounts. Experts suggest a 3–6-month buffer. If you cannot stock away that much, something is always better than nothing.
- Familiarize yourself with your bank’s fees: Some banking institutions charge monthly maintenance fees, minimum balances, and ATM fees. If you are unaware of these disclaimers, terms, and conditions, it can cause you to think you have more money available in your account than you do.
- Keep meticulous records: Be sure that all withdrawals are recorded, no matter how small. Small transactions and fees make you think you have more funds available in your account than you do, which can cause another overdraft.
How a negative bank account impacts your credit score
The impact on your credit score is indirect. The three major credit bureaus – Experian, Equifax, and TransUnion – usually will not include information about your checking account or check-writing history in your credit reports. However, there are separate checking-account reporting companies that do collect and report on information related to your checking account.
In other words, your credit score probably will not go down if your bank account is negative. However, if you close an account with a negative balance, that debt will be handed over to debt collectors, and that will be reported to the three credit bureaus, will hurt your credit score, and will remain on your credit report for up to seven years. You want to avoid this at all costs, so make sure to promptly address any negative balance, whether or not you can immediately repay it.
The bottom line
The best way to deal with a negative account balance is to avoid having one in the first place. You can reduce the chances of winding up with a negative balance by taking some of the steps outlined.
If you still are having issues, it is best to address the deeper reason for your account being consistently in the red.
FAQs
How much in the red your account can be depends on your bank, and if your bank accepts the payment and your account incurs a debt. A negative balance is also known as a bank overdraft. It occurs when a person’s bank account falls below zero.
You usually can’t reopen a closed account, but you can still open a new account. Closures due to negative activity can show up on your ChexSystems report. An adverse ChexSystems history can result in being denied a bank account.
The collections department also notifies credit reporting agency ChexSystems of the debt. ChexSystems maintains records of delinquent accounts, and most banks check ChexSystems records before opening accounts for new clients. Generally, you cannot open a regular checking account at a new bank if ChexSystems reports that you had a charge off elsewhere.
If an old account has a negative balance and you still need to address it, the bank may close it and send the debt to collections. An account with a negative unpaid balance is known as a charge-off, and your bank usually initiates this after your account is past due for around 60 to 90 days. The bank must make a reasonable effort to notify the account holder. If the account holder’s phone number or address changes, the bank is not responsible for tracking the client. Just as you can choose which bank you do business with, your bank can also choose not to do business with you. When a charge-off occurs, the debt does not disappear and can hurt your credit since these accounts are reported to the credit bureaus.
