Banks offer checking accounts to give you a place to keep your money between when you get it and when you need to use it. Your checking account lets you pay your bills, go to a movie, or even give money to a friend without having to carry cash around all of the time and keep it safe. Checking accounts aren't designed to let you use more money than you have, though. When that happens, your bank can charge you fees, make you pay it back and even close your account.
When your account gets to a negative balance, your bank will probably charge you an overdraft fee that makes your account even more negative. Your bank can also close your account if it's negative for too long, or if you repeatedly go negative. Be sure to check your balance regularly.
An overdraft happens when you take more money out of your checking account than you have in it. This can happen because the transactions you do don't always immediately get reflected on your account, so it's possible that you could keep spending without realizing that you've taken too much out of the account.
At times, your bank will know that you've spent too much but will still approve the charge to save you from being declined. Overdrafts can also happen if you deposit money into your account, but something goes wrong and it gets delayed being credited to the account.
When You Go Negative
When your account gets to a negative balance, your bank will probably charge you an overdraft fee that makes your account even more negative. Sometimes, it will charge you multiple overdraft fees for each transaction that happens when you have no money. Once you overdraw your account, your bank expects you to immediately put money in to bring the balance back to a positive balance.
Account Closure For Long-term Negative Balances
Your bank can and will close your account if it's negative for too long. It can also close your account if you repeatedly go negative. The only way to know what your bank will do, and when it will do, it is to ask someone at the bank or to read the disclosure that you got when you opened the account.
Once your account gets closed, you'll still owe the money to your bank, too. Having your account closed by your bank could be the least of your problems, though. Banks have their own set of reporting bureaus, just like the credit bureaus. Once your bank reports you to their bureau, it will likely be difficult for you to open a bank account anywhere else for years, especially if you haven't paid off what you owe.
How to Avoid Overdrafts
One way to avoid going negative is to put some extra money in a savings account linked to your checking account. If you have an overdraft, your bank will pull the money from your savings account to cover the transaction. There may be a fee for this, so it's best not to actually end up overdrafting, but it's better than owing your bank money.
Another option is overdraft protection, which can be applied to ATM withdrawals and debit card transactions, such as store purchases, and also checks and ACH transactions. When a customer enrolls in such a program, the bank will approve the transaction even with insufficient funds in the customer's checking account. There is usually a set fee for this, often around $35. Overdraft fees can quickly add up and sometimes a bank can reject a transaction when there are insufficient funds and still charge a fee. It's not unusual for a bank to charge multiple overdraft fees in the same day.
Another way to avoid overdrafts is to pay careful attention to your account. Check your balance regularly – many banks have smartphone apps or let you check your balance by text message – and don't spend more than you have. Reconciling your bank account may not be a lot of fun, but it's better than paying overdraft fees or losing your checking account.
Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.