My Account Is Overdrawn. What Should I Do?

An overdrawn bank account occurs when the amount of money withdrawn or spent from an account exceeds the available balance. Understanding the implications and knowing how to address an overdrawn status is important for managing personal finances.

What an Overdraft Means

An overdraft happens when a transaction causes your account balance to fall below zero. Banks handle overdrafts in two ways: through an authorized arrangement, often called overdraft protection, or as an unauthorized occurrence. Overdraft protection is a pre-arranged service where your bank covers transactions that exceed your available balance, usually by linking to another account or a line of credit.

Conversely, an unauthorized overdraft occurs when a bank allows a transaction to go through despite insufficient funds. Various transactions can trigger an overdraft, including debit card purchases, ATM withdrawals, checks, and automated clearing house (ACH) payments. Transaction timing also plays a role, as an authorized transaction might cause an overdraft if other transactions clear first.

Steps to Take When Overdrawn

Discovering your account is overdrawn requires immediate attention to minimize costs and resolve the negative balance. Begin by checking your account balance and reviewing recent transactions to identify which charges caused the overdraft. Online banking or mobile apps often provide instant access to this information, detailing pending and posted transactions.

Contact your bank without delay to discuss the situation and understand their policies regarding overdrafts. During this conversation, inquire about any fees incurred, options for covering the negative balance, and whether any pending transactions can be stopped. Prompt communication can sometimes lead to more favorable outcomes, especially if this is a first-time occurrence.

Deposit funds quickly to cover the negative balance and any associated fees. Ensure the deposit amount is sufficient to bring your account back to a positive balance and cover any pending transactions. Some financial institutions may have a cut-off time for deposits to count toward the current day’s balance, impacting when the overdraft is resolved.

If there are pending transactions that have not yet cleared, inquire about stopping them to prevent further overdrafts. While not always possible, halting certain payments can prevent additional fees from accumulating. Finally, politely ask your bank to consider waiving any overdraft fees, particularly if you have a good banking history or this is your first time overdrawing the account.

Understanding Overdraft Fees and Their Impact

Overdrawn accounts incur various fees that can increase the financial burden. The most common charge is the overdraft fee, which banks assess when a transaction causes the account balance to drop below zero. These fees typically range from $25 to $35 per occurrence, though the exact amount can vary by financial institution.

Another common charge is the Non-Sufficient Funds (NSF) fee, also known as a returned item fee. This fee is applied when a bank returns an item, such as a check or an automated payment, unpaid due to insufficient funds. Some financial institutions may also charge an extended or continuous overdraft fee if the account remains negative for a prolonged period, sometimes daily.

Beyond immediate fees, repeated overdrafts can have broader consequences for your financial standing. While a single overdraft generally does not directly impact your credit score, frequent or severe overdrafts can lead to account closure by the bank. If an account is closed due to mismanagement, this information may be reported to consumer reporting agencies, such as ChexSystems, which tracks banking activity. A negative report to ChexSystems can make it difficult to open new bank accounts. Furthermore, merchants may impose their own fees for returned payments, compounding the cost of an overdrawn account.

Strategies to Avoid Future Overdrafts

Preventing future overdrafts involves adopting proactive financial habits and utilizing available banking tools. One effective strategy is to enroll in overdraft protection services offered by your bank. This often involves linking your checking account to a savings account, another checking account, or a line of credit, which automatically transfers funds to cover shortages.

Setting up account alerts through your bank’s online or mobile banking platform can provide timely notifications. These alerts warn you when your balance falls below a certain threshold or when large transactions occur, giving you an opportunity to adjust spending or deposit more funds. Regularly monitoring your account balance through online banking or mobile apps is also important, as it allows you to track spending and identify potential issues before they lead to an overdraft.

Creating and adhering to a personal budget helps track income and expenses, ensuring you do not spend more than you have available. This foundational financial practice provides a clear picture of your cash flow and helps prevent overspending. Maintaining a small financial buffer, an extra cushion of funds in your checking account, can absorb unexpected expenses or minor miscalculations without causing an overdraft. Understanding how long different types of transactions take to process is also helpful, as some debits may not clear immediately, requiring you to account for them even if they haven’t posted yet.