When your checking account’s balance goes into the negatives, you are in “overdraft.” Going into overdraft isn’t a good financial habit to keep up with. These are the potential consequences.
Your transaction won’t go through. Depending on the situation, a canceled transaction could be disappointing or devastating. You could miss the deadline for bill payment and get hit with late fees. You could bounce a check. You could not have enough funds to cover an urgent expense and be at a loss about how to take care of it.
If have overdraft coverage through your bank, your transaction could go through. In some cases, your bank will cover the remainder of the funds for you — essentially, the bank lends you money that will need to repay later. In other cases, you can connect your checking account to a secondary account to cover the remaining funds.
If you don’t have coverage, that transaction will be canceled.
When your checking account goes into the negatives, you will have to pay non-sufficient fund fees/insufficient fund fees. These fees can quickly add up, making it harder for you to bring your checking account back into the black.
If you have overdraft coverage, you won’t have to pay NSF fees, but you may have to pay overdraft fees.
Making a habit of overdrawing your account will impact your ChexSystems report. ChexSystems is a bank account screening consumer reporting agency, which records the banking behaviors of consumers — most notably their bad behavior. These reports help banks know whether you’re a high-risk client. If you have a record of overdrawing your accounts, other banks might not allow you to open accounts with them.
If you go into overdraft too many times, your bank could decide to take action and close your account. And that’s not all. If your account was in the negatives when it was closed and you have outstanding fees, you will still owe the bank that money. If you don’t repay the bank in a timely manner, it could put your debt into collections.
Set up low balance alerts through your online banking. The alerts will let you know when the balance in your checking account is getting low. It will warn you to not make any large transactions until you add more to the account.
If you don’t have overdraft coverage, you may want to consider signing up for this feature through your bank. Some banks don’t even charge overdraft fees when you need to use this protection.
You should build an emergency savings fund. How can this help you avoid overdrafts? If you don’t have enough savings to handle an emergency expense, you might use the funds sitting in your checking account — and since you didn’t anticipate this emergency expense, it could impact your ability to cover other essentials before your next payday. You will have much less in your account, which increases your risk of going into an overdraft.
You can avoid the tricky scenario with an emergency fund. By using your savings, you won’t impact your ability to pay for other monthly expenses. This minimizes the risk of accidentally draining your checking account.
If you don’t have enough savings for an emergency, you should still reconsider using your checking account. You can go to a website like CreditFresh and see whether you’re eligible for a personal online loan. An approved online loan could help you pay for an urgent expense and recover from an emergency quickly. It could be worth applying! You just might get the online loan.
Overdrawing an account comes with some serious consequences. So, follow these tips and never go into overdraft, again!