Finding that you have a negative bank account balance can be a stressful situation. Not only does it mean you don’t have any money in your account but also that you owe it!
This is a situation more common than most of us would think. According to a study, more than 40 million Americans have to deal with it every year. This has now become a $33 billion industry!
Negative bank account balances are the main cause of a practice that many experts have called “frequent and harmful.” Unfortunately, not many people are aware of everything such a balance can entail. Let us break it down for you!
What Happens When Charges Surpass Available Funds?
If you try to spend more money than you have available in your account, you might find that the purchase will go through… but what does having -$150 balance mean?
This is called over drafting, and it happens when you spend more than you have in your account. Different expenses can make this can happen:
- Debit card charges
- ATM transactions
- Using scheduled payments
- Other types of electronic payments
When this occurs, you will most likely be charged overdraft or non-sufficient funds (NSF) fees. Not only are these fees high, but they can also be charged several times a day. Many overdraft fees are above $30.
If an operation ever results in an NSF response, you should stop using that account until you see what happened. It’s entirely possible that you can misjudge the status of your account and attempt several transactions while lacking funds. There’s also a chance that your bank does not charge overdraft fees, so check that when possible.
This is not the end of the world, and it can happen to anyone. However, it is very important to solve the situation as quickly as possible, as unpaid debt makes banks uneasy. You will usually have time to make this right, but consider this debt a priority to prevent future issues.
If time goes by and you don’t solve this situation, your account risks closure.
The bank can also take the collection and even initiate other legal actions. There are also high probabilities that the bank will report your inability to pay, making it harder for you to open checking accounts later on. If that is the case, you might be offered only second chance accounts from that point on.
There are three main ways this insolvency can play out depending on how you configure your account. Let’s take a look at the risks and fees associated with negative account balances!
If you have overdraft coverage, your bank will accept the charged amount if it is within account limits. To enable ATM and debit card transaction overdraft coverage, you have to opt-in. Often, every additional transaction will trigger overdraft fees.
These fees are usually quite bulky and can add up to considerable sums fast. You just have to pay the corresponding debt, including fees.
Also known as “cash reserve checking,” this is a useful feature to enable if you think you can overdraft your account. It allows the bank to use funds from a different account to cover the negative bank account balance. Although it usually involves fees, they are probably much easier on your budget.
You can use a savings account or another checking account, as well as credit cards or a variety of credit lines. Consider that if your credit cards cover overdrafts, those expenses will often be processed as cash advances.
Cash advances usually produce different, higher fees than regular credit card expenses. Other credit lines for this specific purpose typically range from $250 to $5,000.
Keep in mind this is not a substitute for responsible budget management. The reason we mention this is because it can incline you towards taking overdrafts lightly. Of course, it can save some inconveniences, but you should avoid unnecessary fees. You have to opt-in for this to work, so ask your bank about how they implement it.
Lastly, if your account does not have any overdraft coverage or protection, your bank will probably refuse the transaction. It will send a Nonsufficient Funds (NSF) response and often generate NSF fees. These fees are usually as high as overdraft fees.
How Can You Avoid Surpassing Your Available Funds?
Maybe you forgot about that big expense from a couple of days ago and have a wrong estimate of your balance. This can happen to anyone, especially as we handle more cards and less cash every year.
However, keeping in mind the following tips will help you make sure this doesn’t happen again… or at least reduce the risk!
Be Mindful of Your Budget
First and foremost, you should obviously try to stay watchful of your budget. Know how much you can spend and stay within the limits of your accounts. Part of this involves checking your account periodically in order to spot inconsistencies or unexpected charges.
Automatic payments can cause unforeseen changes in your balance, so make sure to include them in your financial planning.
Keeping written records is always recommended and will help spot or solve issues faster. This can be done on paper or through one of the many available budgeting apps and services.
Maintain an Emergency Fund
This is always a recommended practice. Emergency funds can cover you in a variety of undesired scenarios, whether they are mistakes or other unforeseen expenses.
The size of this fund depends on many variables such as your costs vs. income ratio, lifestyle, job stability, and family needs. However, the typical recommended amount is one that can cover three to six months of expenses.
Some banks will have an option to send you a warning if your balance gets below a set amount. This is a highly recommended feature! It can be your second line of defense in case you make a mistake in your budgeting.
Study how this can be done in your bank and gain some peace of mind by preventing unexpected overdrafts. Sometimes mindfulness is the best way to go!
Examine the Configuration for Account Overdrafts
Often, overdraft protection and coverage are not recommended as they generate large fees, which can hurt your budget. For this reason, banks can’t enforce them by default, and you have to ask for these services.
However, make sure to enable them if you think they are right for you. Contact your bank to receive information about what the limits and associated fees are regarding these features.
While you are at it, ask if they have any other information or recommendations on the topic. Sometimes it is possible to acquire credit lines with this specific purpose. According to specific bank policies or local regulations, you can opt for different strategies in your budget planning.
What To Do If You Get a Negative Account Balance?
As soon as you discover you have a negative bank account balance, you should start acting on the matter. The sooner you fix it, the less your credit score will suffer. This is vital to have access to better financial services in the future, including better credit card offerings.
In case you are wondering, banks won’t let you close an account with a negative balance. You must solve this before the bank decides to close your account.
Consider Suspending Activity
While your bank can still allow you to use the account after a negative bank account balance, you should proceed with caution. Most importantly, know that state laws often prohibit writing bad checks or bouncing payments on purpose.
For these reasons, try to solve the negative balance as soon as possible and avoid falling into it again. If your budget has some uncertainty, new charges can interrupt that process or generate additional fees.
As such, you should stop using your account and even cancel automatic payments until you plan a way out of your debt.
This is probably the fastest solution if you have the cash. Just transfer adequate funds to your account, including pending fees and future expenses that could be charged.
If you don’t have the cash but expect future incomes to cover it, consider some other type of lending. Given how expensive overdraft fees are, interest rates can make a loan totally plausible as a way to recover. See what your options are and check the numbers to tell if this is a viable alternative.
Ask The Bank If It Can Waive Your Fees
If this is your first time making this type of transaction, most banks will consider a waiver on your fees. More reasons to have a good relationship with your banks, just in case you need to ask for something like this.
Overdraft fees are usually costly enough to justify a call to customer support, so take a shot at this!
Learn About How Consumers Are Protected
Visit the Consumer Finance Protection Bureau (CFPB) for more information on overdraft and similar services. This agency is part of the US government and was created specifically to help users of financial services.
Its website features tons of information on what companies can and cannot do, as well as advice for sound financial practices.
You can also submit complaints as needed if you suspect unfair treatment. Complaints can sound like unfruitful trouble, but consider that most companies respond within 15 days when contacted through the CFPB.
The CFPB might regulate this category of operations more thoroughly in the future, as it showed interest in tighter policies. Stay informed to know how your accounts can be affected by new regulations on overdrafts.
What Happens If The Bank Closes Your Account?
A bank account overdraw is not a criminal offense and will not translate into jail time by itself. However, it can ruin your credit score. If your situation ended in an involuntary closure, you will have limited options in the future when seeking financial services.
Then, the first order of business will be to pay your remaining debts. Set out to plan a precise roadmap with this in mind, considering interest rates and limiting future expenses.
The best way to get over this is to try and build up your reputation again. Make responsible spending a priority and avoid being involved in deals that can increase your debt. Stay on top of your credit score to know when it has grown to more convenient levels.
Second Chance Bank Accounts
Often, you will be limited to second chance bank accounts if one of your accounts faced involuntary closure. These usually have fewer features and lower spending limits, but some of them are not that bad.
For example, some of these accounts have limitations on the type of checks allowed for deposits. Tighter limits on withdrawals are another very relevant obstacle to consider. Compare alternatives and think it through, as this can be a good tool to rebuild credit score.
If “basic” or second chance bank accounts are not an option or you want to see some alternatives, consider prepaid debit cards or fintech debit cards.
Prepaid Debit Cards
These cards don’t require a credit check and are not linked to a bank account. Overdrafts are not possible through these cards.
Fees tend to be somewhat high for this service, so make sure you check the terms and conditions carefully.
Fintech Debit Cards
As banking evolves, new alternatives appear. Another reasonable option for solving these situations is getting a debit card from some company that isn’t a classic bank.
Some neobanks and P2P fintech companies provide this service and can be a great alternative. If you plan on saving large sums of money in your account, make sure the organization you choose has FDIC insurance, which will cover your funds in case of bank failure.
When inquiring about these services ask how their cards can be used, not only for online and store purchases but also regarding ATM coverage.
Rebuilding Your Bad Credit
If your credit history contains unfavorable events, you should always attempt to make it better. Remember that many issues can appear in your credit report for seven years. In the case of closed accounts, they will remain for up to ten years.
Here are some tips to help pick this indicator up and improve your future opportunities:
Cut your credit card debt
Know that the ratio between your debt and your limits is an important factor and will serve you if you keep your debt at a minimum.
Ask for a higher credit limit for your cards
To improve that ratio, request higher limits if possible. Sometimes this is just a matter of making a call.
Always pay before the due date
This should be self-explanatory, and there are extra reasons for it, such as saving on APR and other fees.
Use credit cards often, but keep charges low
It is good to maintain activity on your cards but always pay balances in full and avoid getting close to credit limits.
Get a copy of your credit report and check that there are no mistakes
This is utterly important if you feel it can contain wrong information. Bad credit reports persist over many years, so fix this as soon as possible.
While having a negative account balance is not a tragedy, it is important to stop it from happening and to stay informed.
Keep that in mind when considering acquiring or switching banks. Don’t be afraid to ask around and query about how each bank handles these situations and what the options are.
Still, our number one recommendation is to avoid a negative bank account balance altogether through responsible budgeting. Be aware of how charges alter your balance over time. The difficult part often lies in predicting when checks and automatic payments will impact your account.
If an overdraft does happen, prioritize saving your credit score by repairing the damage and maintaining your account sufficiently funded.