Negative Bank Balance: What Happens to Your Account Next?

Posted on June 28, 2021 in Banking

Taking more money than what is available in your checking account can lead to a negative bank balance. Overdrawing your account can cost you a lot of money in bank fees.

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, the majority of these people have minimal knowledge of the overdraft rules.

To prevent you from getting a negative bank balance, 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.

What Exactly is a Negative Bank Account Balance?

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

For better understanding, consider the following scenario: Say you purchase goods worth $120 in a supermarket, and you write a check for the purchase. However, when the merchant deposits the check in the bank, your account has only $90, meaning you are $30 less of 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 full amount. If the second outcome unfolds, you will be charged for the $30 overdraft.

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 end up making payments for commodities worth more than your actual balance.  

In an instance where you own more than one account in the same bank, you might get confused about the account to use to make your payment. In such a scenario, your bank account may end up with 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?

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

Overdraft Fee

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 probably charge you a fee for every debit card payment or an 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 decide to close your account if it goes negative repeatedly. However, to know the bank’s exact actions, you should visit the bank or read the disclosure that 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 much as seven years. As such, closing your account does not mean that whatever you owned 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 given the option of opening 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 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 key 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. For the most part, 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 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 overdraw your account, consider discontinuing all non-essential payments or transactions using the account, until the negative balance is sorted. The bank charges you an overdraft or NSF fee for every transaction or 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 not only help you avoid multiple overdrafts but also 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.

You should note that if your bank account stays with a 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 purposefully bounce a payment or write a bad check. 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 can’t keep track of your spending, signing up for low-balance alerts could be the solution for you. Here, you place automatic phone alerts that remind you when your accounts get to a certain balance. This enables you to add funds into the account or to avoid using it to make more payments.

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

Keep Track of Your Spending

You are advised to keep a running ledger and check it before making any transactions or payments. Over the years, this has been made an easy process, especially with the introduction of mobile banking. Keeping track of your account does not only help you avoid mistakes but also allows you to catch charges that you may have forgotten.

It is important to note that checking your bank balance using an ATM or online may not always 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.

Most banks give you the option of linking your checking account with a credit card or savings account. This will help you cover payments when you have insufficient funds in your checking account. While this attracts a fee for some banks, it saves you a lot of money that would otherwise have been charged for NSF or overdraft funds.

FAQ’s About a Negative Bank Balance

What happens if you have a negative 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 report bank accounts that are closed with a negative balance to credit agencies. This information appears on your credit report where it’s indicated as unpaid debts.

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 back account overdraw is not a criminal offense. However, some states are allowed to impose jail terms if there’s proof that the reasons for overdrawing your account are criminal, or support a criminal prosecution.

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 after some time and report to the credit agencies. This will be included in your credit report as unpaid debts and will affect your credit score. Also, you will not be allowed 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.

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