Can Your Bank Account Go Negative?

A bank account is a primary tool for managing personal finances. While accounts are expected to maintain a positive balance, circumstances can lead to a negative balance, also known as an overdraft. This occurs when transactions exceed available funds and can have various financial implications.

How Accounts Can Go Negative

An account goes negative through overdraft when transactions exceed available funds. For ATM withdrawals and one-time debit card purchases, consumers must “opt-in” for overdraft protection. If you opt in, the bank may approve these transactions even if they cause a negative balance, typically assessing an overdraft fee, often around $35. Without opting in, these transactions are generally declined if funds are insufficient, preventing a negative balance and associated fees.

In contrast, transactions like checks and automatic bill payments are often handled differently. Banks may cover these transactions automatically, leading to an overdraft fee, or return them unpaid, resulting in a non-sufficient funds (NSF) fee. NSF fees are usually similar to overdraft fees. Some financial institutions offer “courtesy pay” or “overdraft privilege,” a discretionary service where the bank covers transactions that overdraw an account for a fee.

Linked accounts, such as a savings account or a line of credit, can also be set up for overdraft protection. When the checking account nears zero, funds are automatically transferred from the linked account to cover the shortfall. While this prevents a negative checking balance and avoids overdraft fees, it might incur a transfer fee or, for a line of credit, interest on the borrowed amount.

What Happens With a Negative Balance

When a bank account falls into a negative balance, fees are imposed. Banks typically charge an overdraft fee, which can range from $25 to $35 per transaction that causes the account to go negative or increases an existing negative balance. Multiple transactions can result in several fees accumulating rapidly, exacerbating the negative balance.

A negative balance can also lead to future transactions being declined. The bank expects the negative balance and accrued fees to be repaid promptly. If not repaid in a timely manner, the financial institution may close the account.

If an account is closed due to an unpaid negative balance, the bank may report the account holder to consumer reporting agencies like ChexSystems. ChexSystems tracks banking history, including involuntary account closures and unpaid negative balances. A negative report with ChexSystems can make it difficult to open new bank accounts. While a negative bank balance itself does not directly impact a credit score, unpaid debts sent to collections can affect one’s credit profile.

Steps to Prevent Negative Balances

Preventing a negative bank balance begins with consistent monitoring of account activity. Regularly checking your account balance through online banking, mobile applications, or ATM inquiries provides a clear picture of available funds. Many banks offer low-balance alerts, which can be set up to notify you via text or email when your balance drops below a predetermined threshold. These alerts serve as an early warning system.

Another effective strategy involves setting up overdraft protection by linking your checking account to a savings account or a line of credit. If your checking account balance becomes insufficient, funds are automatically transferred from the linked account to cover transactions, preventing an overdraft fee. While transfer fees or interest on a line of credit might apply, these costs are generally less than standard overdraft fees.

Additionally, consumers have the option to “opt out” of overdraft protection for ATM withdrawals and one-time debit card purchases. If you opt out, transactions that would overdraw your account will simply be declined at the point of sale or ATM, rather than incurring a fee. Practicing proactive budgeting and tracking expenses are important steps to ensure sufficient funds are available. Should a negative balance arise, immediately contacting your bank to discuss repayment options or fee waivers can help mitigate the consequences.