It can happen to anyone. Maybe money is tight, and you think you have a little wiggle room before that check you wrote and mailed arrives at your bank for payment. Or perhaps you’ve been under pressure at work and you were distracted, forgetting to deduct that debit card swipe from your checkbook balance.
The next thing you know, you’ve overdrawn your checking account. An overdraft occurs when you debit more from your account, either electronically or by check, than your existing balance can accommodate . The glitch is sometimes referred to as “bouncing” a check, and it will most likely cost you some money.
How an Overdraft Happens – An Example
You think you have $500 in your bank account, and you also know that you’ve written two checks totaling $490. They haven’t hit your account yet. They’re still floating around out there somewhere, and they could be presented to your bank for payment at any time.
You swipe your debit card for a purchase to the tune of $9. All should be okay, right? You still have a $1 balance after all is said and done – unless for some reason you actually have only a $490 balance in your account.
Your $9 swipe is honored, so now there’s only $481 in your account: that $490 minus $9. Then those other checks hit after you make that debit. There’s not enough in your account to cover both of them. The bank will pay at least one, the first to be presented for payment, because you have enough in your account to cover that. The second check to be presented for payment will create an overdraft. Your account will be $9 overdrawn if your bank honors it, then they’ll most likely tack on an overdraft fee as well.
The same sort of process can occur if you’ve set up automatic payment at your financial institution for certain monthly bills to automatically debit from your account, and the fact that one of them was about to hit your account slipped your mind when you made that debit card transaction. Or it’s possible that you deposited someone else’s check that’s bounced, so that money isn’t really there in your account after all.
What Happens at the Bank
Something else to keep in mind is that banks are night owls – transactions from that day are often tallied up and subtracted from your account overnight. You might have checked your balance before you swiped your debit card, so you realized that you actually had only $490 in there. But you went ahead with the debit card transaction anyway because you have more than enough in your account to cover at least that much, and you know you’ll be making another deposit before day’s end.
But all transactions from that day will be registered by your bank overnight, often in the order in which they were presented for payment during the day, so you could still come up short. And some banks process checks starting with the largest one first.
Still other banks cut off deposits after a certain hour each business day. They’ll still take your money, but if their cutoff was 3 p.m. and you don’t make that deposit until 4:30, it won’t be credited to your account that night.
About That Overdraft Fee
The end result of all this is that your bank is probably going to penalize you for the mishap, whatever its cause. It’s going to charge you an overdraft fee. Your balance won’t be a negative $9 after the dust settles. You'll be more in the area of $45 overdrawn: that $9 plus an additional $35 or so overdraft fee. That $35 will be deducted from your next deposit.
The bank is effectively charging you for your error. An overdraft fee is just another debit, one you probably weren’t anticipating, and it was charged because your bank account balance wasn’t sufficient to cover all your transactions.
There Are Different Types of Overdraft Fees
Unfortunately, the situation gets even more complicated. Your bank has some options when there’s not enough money in your account to accommodate a transaction that’s been presented for payment.
The bank can elect to pay, or “cover,” the transaction, and this will overdraw your account and put it in the red. The entity to whom you’ve written a check will never be the wiser – they’ll still get their money. This is technically what results in an “overdraft” fee.
But the bank might instead decide not to cover the transaction. It might decline to pay the check or honor the transaction because you don’t have enough money in your account to cover it. This can result in a “non-sufficient funds” fee, sometimes called a "returned item overdraft fee." And beware, because that bounced check can be resubmitted for payment again if it’s not honored the first time. This will result in another non-sufficient funds fee if you still don’t have enough in your account to cover it.
How Much Will Your Bank Charge You?
Overdraft fees run about $30 on average, according to the FDIC. Bankrate conducted a survey in 2019 that indicated a more exact number: $33.36. Some banks might charge less, but others charge more, and Bankrate also says that these fees have consistently gone up over the last 20 years. It found that Ally, an online-only bank, was the kindest when it came to overdraft fees at just $25. USSA charges $29. Other banks all fall in the $30-plus range:
- Chase: $34
- Capital One: $35
- Bank of America: $35
- Wells Fargo: $35
- BBVA USA: $38
Keep in mind that these numbers are for each transaction, so you’ll be hit with $70 in fees if you bounce two checks at Wells Fargo. Some banks, such as BBVA, place caps on how many non-sufficient funds fees can be charged to your account in a single day, but it’s not very comforting. BBVA will charge you up to six times in a single day.
Many banks will add on an additional few dollars, as much as $5, for each day your account remains overdrawn. BBVA charges $23 as an “extended service charge” if your account remains overdrawn for seven days or more. No federal law regulates how much banks can charge, although some states might place caps or set amounts. Banks must tell you how much they’ll charge when you open an account, however, so you should know what to expect.
And this might not be the end of it. You’ll recall that your bank can decide not to honor your check and return it to the payee instead. This can result not only in a non-sufficient funds charge from your own bank, but a “returned check” fee from the entity you paid – or failed to pay – as well. This can run an additional $30 or so.
How to Prevent Overdrafts: Keep a Register
In a perfect world, we’d all be 100 percent on top of our finances and always have plenty of money to meet our needs. But you can take a few steps to avoid overdrawing your bank account if that day hasn't arrived yet.
The best preventive measure is to pay attention – really pay attention. Keep a record of every debit transaction you make from your account, whether it’s a check you wrote, a debit card transaction, cash from an ATM or an automated regular bill payment like that gym membership. Don’t overlook other bank charges, such as monthly maintenance fees. And keep track of every deposit you make.
Set up a spreadsheet on your laptop or tablet, or keep a checking account register the good, old-fashioned way with pen and paper. Don’t neglect to double check yourself. It’s incredibly easy to jot down $34 instead of $43 when you’re tired or harried.
And remember that discretion is generally the better part of valor. If you and your bank disagree on your balance, go with the lesser number until you can determine what’s causing the difference and what your true balance is, at least until you get the matter straightened out.
You can set up alerts with some banks, and they’ll tag you if your account balance falls below a certain threshold you’re comfortable with. You might receive a text message or an email. In either case, you can make a deposit or put your debit card on ice for a while to avoid overdrawing those funds.
Have a Backup Plan
Another option is to link your savings account to your checking account for instant transfer of funds. Don’t take a chance with that $9 debit card transaction. Grab your smartphone and transfer the money before you swipe, just in case. Most banks offer web and mobile technology that will allow you to easily do this. You can even sign up with some banks to have them make the transfer for you to prevent you from overdrawing. There’s sometimes a fee for this, but it’s generally not as hefty as $35.
As for those debit card and ATM transactions, federal law gives you an option here as well. As of 2010, you can opt in or opt out to have your bank honor these transactions when they’ll overdraw your account. The bank can charge you the usual overdraft fee if you opt in, but it will cover the transaction. The bank will decline the charge if you don’t opt in, but federal law now prevents it from charging you an overdraft fee in this case.
Consider Overdraft Protection
Yet another option is to set up overdraft protection with your bank by establishing a line of credit that’s tagged for this purpose. The necessary amount will be transferred to your checking account to cover any overdrafts and prevent them from happening. The service will probably cost you about $15 a month, and you’ll have to qualify, just as you would for any loan. You’ll probably have to pay interest on any amount that’s transferred. But again, $15 per month is far preferable to $35 per bad transaction.
Linking your checking account to a credit card you have with your bank works similarly, but you’ll most likely be charged a cash-advance fee to move money from a card to your checking account.
What Happens Next?
Act as fast as possible if you overdraw your bank account. Deposit at least enough to cover your transaction, even if you can’t also cover the overdraft fee right away. And it never hurts to ask the bank to waive the fee, particularly if you’ve always been a customer in good standing. You might get lucky and they’ll agree.
If there’s any good news here, it’s that bouncing a check won’t hurt your credit score, at least not in and of itself. That would only happen if you don’t rectify the situation with your bank or the entity you paid so the overdraft is eventually turned over to a collection agency.
Negative banking information can be submitted to ChexSystems, however. This is similar to a credit reporting agency, but it reports only banking activity. Banks refer to your ChexSystems report when deciding whether to let you open an account with them, and you could be denied if your report is particularly spotty, such as if you have a history of negative balances.
- FDIC: Your Guide to Preventing and Managing Overdraft Fees
- Office of the Comptroller of the Currency: Protecting Yourself From Overdraft and Bounced-Check Fees
- HelpWithMyBank.gov: Answers About Overdraft/NSF Fees and Protection
- Bankrate: What Is an Overdraft Fee and How Do You Avoid It?
- Experian: What Are Overdraft Fees?
- BBVA: About Overdraft Fees
- BBVA: About Overdrafts
- Chase. "Overdraft and Overdraft Fee Information for Your Chase Checking Account." Accessed March 16, 2020.
- MassMutual Federal Credit Union. "Overdraft Privilege Information & Disclosure." Accessed March 16, 2020.
- Experian. "What Are Overdraft Fees." Accessed March 16, 2020.
- Consumer Financial Protection Bureau. "ChexSystems." Accessed March 16, 2020.
- Experian. "Why Was I Denied a Checking Account." Accessed March 16, 2020.
- Experian. "Does an Overdraft Affect Your Credit Score." Accessed March 16, 2020.
- State of California Department of Justice. "Bad Checks." Accessed March 16, 2020.
- Consumer Financial Protection Bureau. "Know Your Overdraft Options." Accessed March 16, 2020.
- Santander Bank. "The Benefits of Having an Overdraft Line of Credit." Accessed March 16, 2020.
- Consumer Financial Protection Bureau. "Understanding the Overdraft “Opt-in” Choice." Accessed March 16, 2020.
- Wells Fargo. "Consumer Overdraft Services," Page 8. Accessed March 16, 2020.
- Consumer Financial Protection Bureau. "You Have Protections When It Comes to Automatic Debit Payments From Your Account." Accessed March 16, 2020.
- Wells Fargo. "Alerts." Accessed March 16, 2020.
Beverly Bird has been writing professionally for over 30 years. She is also a paralegal, specializing in areas of personal finance, bankruptcy and estate law. She writes as the tax expert for The Balance.