Negative Bank Balance: What Happens to Your Account Next?

A negative bank balance, also known as a bank account overdraft, occurs when a person’s bank account balance falls below zero. For example, taking out more money than what is available in your checking account can result in a negative bank account balance. When this happens, your account will be overdrawn, costing you many dollars in bank fees. To prevent a negative balance in your bank account, we discuss what it means to have a negative bank balance, what happens next, and what to do to get out of the situation and find relief.

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If you have a negative bank balance, then you’re not alone. Research indicates that about 18 percent of Americans incurred overdrafts in the past 12 months, with three-quarters of those incurring a penalty fee. According to the research, most of these people have minimal knowledge of the overdraft rules.

Key Takeaways

• It is known as an overdraft when your bank account balance drops below zero dollars.
• If you have overdraft protection, your bank may allow your account balance to go into the negative, but they may also charge you a fee for each transaction.
• To participate in overdraft protection programs, bank clients must opt-in, per federal requirements.
• If you repeatedly overdraw your bank account and don’t bring the account balance current, the bank may terminate your account and refer you to collections.
• Overdraft costs may be avoided by keeping a tight eye on your account and tying it to a savings account.

What Exactly is a Negative Bank Account Balance?

Also known as a bank account overdraft, a negative bank account balance is when a person’s balance goes below zero. Usually, this happens when you have an inadequate account balance but continue to make payments. If the bank accepts the payment, your account incurs a debt, making your balance negative.

For better understanding, you could consider the following scenario: Say you purchase goods worth $120 in a supermarket and write a check for the purchase. However, when the merchant deposits the check in the bank, your account has only $90, meaning you have $30 less than what is due for the check.

In such an instance, there are two possible outcomes – either the check “bounces” or your bank pays the merchant the total amount. In the second outcome, you will receive a charge for the $30 overdraft. This is because, in this example of how your bank account might go negative, you would perform the following math: $90-$120=-$30.

Why is my Bank Account Balance Negative?

Your bank account may end up with a negative balance for various reasons. For instance, you may have a negative balance when you deposit a check and make the payment instantly before the money reflects in your account. Second, you may forget the amount of money you have in your account and make payments for commodities worth more than your actual balance.  

When you have more than one account with the same bank, you might be confused about which to use to make your payment. In such a scenario, your bank account may have negative funds even though your other account has enough money.

Note: there are other ways you may end up with a negative bank account other than writing a check. Some of these include;

• Use of debit card
• Direct withdrawal from the bank
• Use of electronic modes of payments like scheduled payments
• ATM transactions

What are the Consequences of a Negative Bank Account Balance?

If your account gets a negative balance, there are several consequences that your bank will likely impose. These include; an overdraft fee, account closure, or a credit impact, as discussed below;

Bank Overdraft Fees

If you make a payment or a transaction that leads to a negative balance in your bank account, your bank charges you an overdraft fee. Also, if you accept these charges, the bank will charge you a fee for every debit card payment or ATM transaction that renders your account balance negative.  

At the time, the bank will charge you several overdraft fees for all transactions that occur when you have no funds. After your bank balance becomes negative, your bank expects you to deposit funds into the bank account to make the balance positive again.

Account Closure

If the negative balance in your bank account persists, your bank can and will probably close your account. The bank may also close your account if it repeatedly goes negative. However, to know the bank’s exact actions, you should visit the bank or read the disclosure you received after opening the account.

Once the account is closed, your bank notifies a checking account firm that stores the information about your account for as many as seven years. As such, closing your account does not mean that whatever you own in the bank disappears.

Credit Effect and Debt Collection

In addition to closing your account, banks can report you to their reporting bureaus, which are similar to credit bureaus. Once your name is listed with these bureaus, it becomes hard for you to open a bank account from any other bank in your country or overseas.

Alternatively, you may be allowed to open an account with added charges and other restrictions. For example, you may be forced to have a specific non-withdrawable balance in your account.

Banks can also use the services of a debt collection firm or collection agency to collect the overdraft amount from you. These firms use various collection methods and may even report you to credit bureaus which can negatively affect your credit score. Paying overdraft fees is critical if you don’t want to get into a situation where you might have to try to fix your credit yourself.

Overdraft Vs. Non-Sufficient Funds Fee

An overdraft fee is the amount of money your bank charges to cover a payment or transaction when you have insufficient funds in your account. The fee is about $31 per transaction for most credit unions or small banks, while bigger banks charge $34 per overdraft.

Sometimes transactions fail to materialize, or checks bounce when you have insufficient funds. In such cases, financial institutions can charge you the non-sufficient funds fee. Mostly, the non-sufficient funds fee and the overdraft fee are the same. There are, however, some scenarios where the bounced payment can attract more fees from the recipient.

What Happens Next if I Overdraw My Bank Account?

If you happen to overdraw your account, there are several steps you should consider taking, as discussed below:

Stop Using the Account

If you have a negative account balance, consider discontinuing all non-essential payments or transactions using the account until the negative account balance is sorted. The bank charges you an overdraft or Non-Sufficient Funds NSF fee for every transaction made using the account. Continuing to use the account will make the negative figure even bigger.

If you have automatic payments that are supposed to be made using the account to cover certain recurring expenses, consider stopping them as well.

Transfer Money into the Account

The next step should be to get funds into your account as soon as possible to help avoid snowballing your debt. Transferring or depositing money into your account will help you avoid multiple overdrafts and allow you to pay your fees.

Ask for Waived Fees

If the bank charged you the NSF or overdraft fee, consider calling their customer care service line and request a waiver. Most financial institutions will waive the fee, especially if your account is incurring a negative balance for the first time.

Pay Third Parties

When a merchant tries to charge your account and fails because of a negative balance, then that could be a problem. The merchant will incur some additional cost for “bounced” checks. In such a case, you’ll be required to not only pay the NSF fee to the bank but also settle up what you owe the merchant.

Can I Still Use my Debit Card with a Negative Bank Balance?

Banks will allow you to continue using your debit card even when your account is negative, provided you’ve opted in for their overdraft protection program. It’s, however, advisable that you avoid the overdraft program at all costs! This is because of the consequences associated with overdrawing your account.

For example, you get charged a fee ($31 for smaller banks and $35 for larger banks) every time you overdraw your account. Ultimately, this will increase the negative bank balance, thus increasing your debt.

Just so you know, if your bank account stays negative for an extended period, your bank can close it. In a bid to salvage their cash, banks can also engage debt collections firms that can list you with credit bureaus. This can negatively affect your credit score.

Also, according to state laws, it’s illegal for an individual to bounce a payment or write a bad check purposely. Making payments using negative balance accounts knowingly is fraud. Banks are allowed by law to charge you with a crime if your check bounces.

How Do I Avoid a Negative Bank Account in the Future?

After clearing the negative balance, you can still use the same account for your day-to-day activities. However, you must consider taking several steps to avoid overdrawing your account again. Some of these steps include:

Sign up for Low Balance Alerts and Automatic Direct Deposit

If you have trouble keeping track of your spending, signing up for low-balance alerts could be your solution. Here, you place automatic phone alerts reminding you when your accounts reach a certain available balance. These push notifications let you know when to add funds to the account or avoid using it to make more debit card transactions or other payments.

Automatic direct deposits help you avoid overdrawing your account by depositing your paycheck into the account of your choice.  

Keep Track of Your Spending

Keep a running ledger and check it before making any transactions or payments. Over the years, this has been made more accessible, especially with the introduction of mobile banking. Keeping track of your account not only helps you avoid mistakes but also allows you to catch charges that you may need to remember.

It is important to note that checking your bank balance using an ATM or online may only sometimes give you the exact balance. That’s why you should run bank balances regularly.

Opt-Out of the Overdraft Program

Banks can only allow you to overdraw if you have opted into their overdraft coverage. If you opt out of this program, the banks can’t charge you overdraft fees for debit card payments or ATM withdrawals.

Link Saving Account to a Savings Account or a Credit Card

Most banks allow you to link your checking account with a credit card or savings account. These linked accounts will help cover payments when you have insufficient funds in your checking account, as money will automatically move between your accounts. Some banks provide this service for free, while others charge a fee. However, in either case, you will save a significant amount of money that would otherwise result in a charge for NSF (non-sufficient funds) or overdraft fees.

Other Options for When You Overdraft Your Bank Account

There are several other options to consider regarding your account balance and avoiding overdraft fees. Some of these options may offer a temporary solution to bring your account back into a positive balance. A quick disclaimer: Take caution before you jump into any quick cash schemes because they can bring additional fees that will put you at financial risk. While they may be quick solutions, not all of these are recommended because they can quickly get you into more debt than you were in, to begin with.

Ask If Your Bank Offers Student Accounts or Student Overdrafts

Some banks offer student overdraft arrangements. It is similar to a regular overdraft, except it is interest-free. In some cases, the bank allows students with this type of account to wait to pay back their overdrafts until they have graduated. This may be a good option for you in the future. But if you already have a negative account balance, this option may not be available immediately.

This is not the same thing as a student loan. Student loans are usually restricted so that you can only use the funds for your education. A student loan usually can’t be used to balance a checking account if it is overdrawn.

Try to Get a Line of Credit From a Bank or Credit Union

If your account is overdrawn, consider getting a line of credit from your bank or credit union. These types of lenders may be able to offer you a longer-term loan so that you can have a positive account balance. If you have a good relationship with any credit card companies, you can also see if one would be willing to provide a line of credit to help you. A line of credit is a safer option for returning your zero balance to the positive.

This personal finance option is usually available to people who have yet to have their accounts overdrawn repeatedly.

Try to Get a Payday Loan or other Short-Term Loan

Thousands of quick-cash loan businesses will let you get an extremely short-term loan of a few hundred dollars by the next business day. You can then deposit money into your account to cover your negative balance. These businesses should be considered an absolute last resort. Agencies like the FDIC warn these payday loan businesses are often predatory. They charge high fees and interest rates that can put you in trouble quickly.

Payday loans are usually for small amounts of money, like $500 or less. They are meant for people who need money quickly. Payday loans give you the money right away, but they have very high-interest rates and are often based on your income instead of your credit history.

The Center for American Progress says that people in the U.S. lose $9.1 billion yearly because of how payday loan lenders work. Payday loans put people in a cycle of debt that hurts local economies and leads to things like higher overdraft fees, putting off medical care, and financial ruin.

FAQs About a Negative Bank Account Balance

What happens if you have a negative account balance in your bank account?

When you have a negative balance in your deposit account, the bank can charge you overdraft fees, freeze your account or even close it if the negative balance persists. Usually, banks will report closed accounts with a negative balance to credit bureaus. This information appears as an unpaid debt on your credit report.

How long can your bank account be negative?

The amount of time it takes to close a negative bank account will vary from one bank to another, depending on their policy. Other factors like the size of the negative balance and the customer’s baking history also come into play. However, most banks will take anywhere between 30 days to 4 months to close negative accounts.

Can you go to jail for negative bank accounts?

No. A bank account overdraw is not a criminal offense. However, some states can impose jail terms if there’s proof that the reasons for overdrawing your account are illegal or support criminal prosecution. If it’s proven you bounced checks on purpose, you may be charged in some places.

What happens if I don’t pay my negative bank balance?

If you don’t pay your negative bank balance, the bank will close the account and report it to the credit agencies after some time. This will appear on your credit report as unpaid debt and impact your credit score. You will also be unable to open another account with the bank.

Can you close a bank account with a negative balance?

No. If you request to close an overdrawn account, your bank will require you to pay the balance before they can close the account. Without that, banks will refuse to close the account.