When you leave your checking account negative, your bank can impose fees, freeze the bank account and eventually force account closure. A closed bank account with a negative account balance is often reported to credit agencies and shows up on your credit report among unpaid debts. This can negatively impact your credit score and remain on your report for up to seven years. Take a look at some important FAQs about overdrawn bank accounts.
Are Bank Fees Charged on an Overdrawn Checking Account?
When your available balance falls into the negative, your bank assesses a nonsufficient funds fee (NSF fee) on the item that caused the balance to drop below zero. Some banks charge as much as $35 per transaction.
The bank may pay to cover the check or send the returned check back to the payee. If the negative balance is due to a debit card transaction, the bank may cover the cost of the purchase and assess a fee without you knowing it until later.
When additional items are posted to your account after it goes into the negative, your bank can charge additional fees for each of those bounced checks, which can add up.
What Are Extended Overdraft Fees?
Many banks charge so-called "extended overdraft fees" if your account balance remains in the negative for more than a week. Therefore, even if no more items are presented for payment against your account, the negative balance can continue to increase.
Banks attempt to contact account holders when accounts fall into the negative and continue trying to reach you while the account balance remains below zero. If you have notifications enabled on through online banking or your mobile banking app, you can give the financial institution permission to send you low balance alerts via email or text message.
What Is the Right of Offset?
If the terms of your deposit account allow it, a bank can use the "right of offset" to transfer money from your savings account or another bank account with a positive balance to make a payment on another debt you owe the bank, according to the Office of the Comptroller of the Currency. Bank policies and state laws vary on the right of offset, but banks sometimes do not need to notify you before using the right of offset.
What if My Account Closure Is Due to a Negative Bank Balance?
Banks generally will not close an overdrawn checking account until you deposit money and bring the account current. Ideally, a bank would like its money back before allowing account closure.
However, it is unlikely that a financial institution will keep a negative account open indefinitely. Banks do have the right to force the involuntary closure of your account. Check your bank's policy for specifics.
If the bank charges off your account as bad debt, it can notify ChexSystems, the agency that collects information about consumers to inform lenders of potential risks. The bank or credit union can also notify the credit bureaus and forward the bad account for debt collection. In this way, a persistent negative bank account can impact your credit score, cautions the Consumer Financial Protection Bureau.
How to Use Overdraft Protection and Avoid a Negative Bank Account
The multiple fees assessed for bounced checks and overdrawing can dig a hole into your personal finances that is hard to climb out of. Getting the account current quickly is critical, and safeguarding yourself against an overdrawn account and the resultant bank fees is worth the effort.
- Opt in for overdraft coverage: Check with your bank to learn your available options. Some banks offer a line of credit for overdraft protection, while others allow you to permit them to transfer money from linked accounts before your bank account reaches a negative balance.
- Learn about available overdraft services for debit card transactions: Some banks let you decide how to handle debit card transactions when you have insufficient funds.
- Enable mobile banking app notifications: Set up your mobile app to allow notifications for low-balance alerts. This will enable you to deposit or transfer money when your account is below an amount of money you specify.
- Set up direct deposit: If your checking account deposits are made in person or at the ATM, consider changing to direct deposit to make funds available to you quickly.
- Monitor automatic payments: Make sure you are aware of when automatic payments will come out of your account so you can ensure you have enough money to cover them.
- Look for an account with no overdraft fees: While you will still need to keep a positive balance, with a fee-free account, you can avoid the pitfalls of being hit with multiple fees if you slip up.
If it is the first time you have overdrawn your account, call your bank and talk to them about what happened. Some banks will issue a one-time grace for these occurrences or allow you one business day or more to make the account current without penalty.
This article was written by PocketSense staff. If you have any questions, please reach out to us on our contact us page.