Spending more money than you have in your bank account will cause a negative bank balance. In addition to leaving you without available cash, a negative balance can cost you in fees — and it might not be just one fee, either. Your bank may charge you a fee each time you overdraw your account.
Overdraft fees can add up quickly. They average $34 for each occurrence. That’s why it’s important to avoid a negative account balance. The most obvious way to do so is to have enough money in your account to cover your transactions and employ strategies to alert you if your available balance is low.
A negative balance is what happens when the amount of money in your account is less than zero.
A negative balance on your bank statement isn’t the same as a negative credit card balance on your credit card statement. In the latter case, it means you’ve overpaid or received a refund and the credit card company owes you money. In the former, it means your purchases have exceeded your available funds and you owe the bank money.
A negative account balance may bring with it two kinds of fees:
There are a variety of reasons your bank account may have a negative balance:
A negative account balance can trigger fees and leave you unable to access your funds, either to pay bills or make purchases. Bank charges may follow, and at worst, you may face account closure.
An overdraft protection plan is an overdraft service provided by your bank that ensures that the transaction goes through. When a customer opts in for this service, the bank designates a backup account for the bank to use as a source of funds to cover any overdrafts. This is typically a linked savings or line of credit account. The bank charges the customer overdraft fees to process the transaction.
Federal regulations prohibit banks from automatically enrolling their customers in this program. Opting into this service has its pros and cons. On the one hand, you are guaranteed that your transaction will be covered. On the flipside, you have to pay fees for the service.
In 2022, the average overdraft fee in the United States was $29.80.
A negative account balance can have a variety of consequences, none of them good. Here are a few things that might happen.
You can face penalties in the form of fees that you will have to pay if you overdraw your account. As mentioned above, there are two main types of fees banks charge: overdraft fees and non-sufficient fund (NSF) fees.
Some banks charge you an overdraft fee each time you make a transaction while you’re in the red, so if you don’t notice a problem right away, you could be on the hook for overdraft fees into the triple digits. Other banks charge you a fee each day your account balance stays below zero.
A non-sufficient funds (NSF) fee is a fee your bank charges you if you try to spend more money than is in your account. Unlike an overdraft, the bank won’t cover anything more than what you have in your account, so you won’t go into the red. Instead, your debit card will be declined or your check will bounce. But you’ll still have to pay an NSF fee on top of that.
A bank can close your account for any reason and without warning. This is called an involuntary closure.
Reasons for an involuntary closure include too many bounced checks or overdrafts, maintaining a zero balance for too long, or failing to reconcile a negative balance. Questionable activity that may lead the bank to suspect identity theft can also lead to an involuntary closure, and so can a previously undisclosed criminal conviction.
Your bank may also limit the number of transfers you can make between accounts. If you exceed this limit, such as by repeatedly moving money from your savings account to your checking account to cover your expenses, the bank may close one of your accounts.
An overdraft does not affect your credit score directly. Your bank is not a creditor and therefore won’t report an overdraft to the three major credit bureaus.
However, having a negative balance can affect your credit indirectly. For instance, if you go to make a payment on your credit card, but the payment is declined because of non-sufficient or insufficient funds, you may wind up being late, which can hurt your credit. This is because payment history counts for the biggest chunk of your credit score (35%) under the FICO® system. Learn more about how credit score is calculated.
If you overdraw your bank account, you owe the bank however much you’re in the red, plus any fees the bank may charge. If you don’t pay, the bank can take you to court and obtain a judgment against you. If they win the judgment, the court may allow them to garnish your paycheck. (Note: Not all states allow wage garnishment.) While this is an extreme consequence, it can happen.
There is a bank reporting bureau called ChexSystems that monitors bank and credit union accounts for things like bounced checks, unpaid negative balances, overdrafts, fraud and involuntary closures. This doesn’t affect your credit report or score, but negative marks from ChexSystems may hurt your ability to open a new bank account in the future.
A bank or credit union has every right to deny your application for a new account based on negative information in your banking history.
If your bank account balance is negative, the worst thing you can do is ignore it. It’s important to take steps to rectify the situation. Here are some things you can do.
If you’ve overdrawn your account, and it’s not a regular occurrence, your bank may be willing to reverse the fee — especially if you have a good and reasonable explanation.
You can contact your bank, explain what happened, and ask them to reverse the fee. If you have already paid your balance, that’s a point in your favor. If not, assure them that you plan to do so promptly. Politely remind them of your history as a reliable and valued customer, and ask to speak to a supervisor if the customer service representative can’t help you.
You may not want to give up after the first try; consider calling back at another time and talking to someone else to see if you can get overdraft fees back.
Paying the fees you owe promptly shows the bank that you take the matter seriously and can help you avoid further overdraft fees. It will also restore access to your account.
If you have more than one bank account like a savings account or a second checking account at the same institution, or a separate account at a different bank or credit union, you can transfer some of the funds from these accounts to the overdrawn account to put your account back in the black and keep you from risking further fees.
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 these steps:
Here are some frequently asked questions on how to deal with negative balances on your account.
If you have overdraft coverage on your account, you may be able to continue using your debit card up to a point. However, in doing so, you risk incurring an overdraft fee with each use, so it’s not a good idea to do so.
Yes, you do. Otherwise, your account will turn into a debt. Your bank can close your account and pursue legal means of recovering the money you owe.
The answer varies from one bank to the next, and there’s no minimum amount of time a bank has to wait before closing your account. Under the agreement you sign when you open your account, a bank may state it will provide you with a written notice and give you five to seven days from that point before they close your account. If you have been a valued and reliable customer, the period may be extended to allow you to put your account in the black, but it’s best not to count on that because a bank is under no obligation to do so.
A financial institution can close an account or freeze it if you fail to pay a negative balance, which might later appear on your credit reports as a collection account. While the bank can close an account with a negative balance, that doesn’t negate the responsibility to pay that balance. Similarly, the client can’t close the account in an attempt to eliminate the balance; the bank is the one that can terminate the account if it has a negative balance.
If you don’t pay a negative balance over a period of time, the bank may sell your debt to a collections agency. The debt collector will attempt to collect it along with additional fees. The collection agency will then create an account in your name and report that information to the credit bureaus if you refuse to pay.
Any number of things can lead to a negative balance in your bank account, from debit card transactions to automatic payments to delayed checks. Monitoring your finances can help you avoid costly fees and problems that can ultimately affect your credit if you are unable to repay what you owe.
Staying on top of your account balances while monitoring your payments and transactions closely is key to ensuring you avoid negative balances, fees, and the risk that your account may be closed.
Jeff Smith is the VP of Marketing at Self Financial. See his profile on LinkedIn.
Ana Gonzalez-Ribeiro, MBA, AFC® is an Accredited Financial Counselor® and a Bilingual Personal Finance Writer and Educator dedicated to helping populations that need financial literacy and counseling. Her informative articles have been published in various news outlets and websites including Huffington Post, Fidelity, Fox Business News, MSN and Yahoo Finance. She also founded the personal financial and motivational site www.AcetheJourney.com and translated into Spanish the book, Financial Advice for Blue Collar America by Kathryn B. Hauer, CFP. Ana teaches Spanish or English personal finance courses on behalf of the W!SE (Working In Support of Education) program has taught workshops for nonprofits in NYC.