Realizing you’ve spent more money than you have in your checking account can be stressful. If you find yourself in this situation, you might worry about what happens next.
Read on to learn more about how overdrafts work and how a negative checking account balance might affect your financial situation. Plus, find helpful tips that could help you avoid overdrafts — and overdraft fees — in the future.
An overdraft occurs when you spend more than the available balance in your account, causing it to go negative. This happens when you have overdraft coverage, which is an agreement between you and your financial institution. With this protection in place, your bank or credit union may cover transactions that exceed your checking account balance — essentially extending you a short-term loan.
In exchange for overdraft coverage, you typically pay an overdraft fee each time you use the service. (Your financial institution will also expect you to repay the overdraft amount ASAP.) Overdraft coverage usually features a preset limit, and financial institutions may still choose to decline certain transactions at their discretion.
Some financial institutions may also offer overdraft protection, which works a bit differently than overdraft coverage. With overdraft protection, you avoid a negative balance with an automatic transfer of your own money from a linked bank account (like a savings account) or a line of credit. Some banks may still charge a fee for using overdraft protection, but it’s typically a lot less than an overdraft fee. Other banks may offer this type of overdraft protection for free.
Read more: How much can I overdraft my checking account?
Overdrafting your checking account could trigger several frustrating consequences. But your exact experience depends on your bank’s policies and whether you had overdraft coverage or protection in place.
Here’s a brief overview of the possible consequences of overdrafting your checking account.
Overdraft fees: If you opt into overdraft coverage, your bank will usually cover transactions above your account balance (up to a limit). But this coverage comes at a price. Overdraft fees often cost around $35 per transaction, according to the FDIC, and multiple fees can add up quickly if you’re not careful.
Declined transactions: Without overdraft coverage — or if you go over your overdraft limit — your bank may decline transactions that exceed your account balance. Even if you sign up for overdraft coverage, your bank may still deny certain transactions at its discretion.
Account closure: Consistently overdrafting or leaving your account in the negative for too long could lead to the closure of your account. So, even if you have overdraft coverage, you should still avoid overdrafting your account whenever possible.
Debt collection: If your bank closes your account while you still owe money, it might send the negative balance to a collection agency. Collection accounts can remain on your credit report for up to seven years and may damage your credit score.
Overdraft fees can add up and may have a negative impact on your financial well-being. The good news: There are several ways to avoid overdrafts. The tips below could be a good place to start.
If you don’t set up overdraft coverage, your financial institution may simply decline transactions that exceed your available balance. This approach could be worth considering if you’re looking for ways to save money on bank fees.
While a potential declined transaction may be inconvenient, it also means you avoid overdraft fees — an important consideration if you’re following a tight budget.
Overdrafts often happen due to overspending. But if you make a plan for your income, expenses, and spending (aka a budget), it can be easier to avoid these types of financial setbacks and the fees that come with them.
Read more: Your complete guide to budgeting for 2025
As you create a budget, it’s important to learn the due dates of your bill payments and how they correspond with your pay periods. Some creditors may even let you change your due dates. So, if having a large bill due a few days before you get paid makes it harder to stay on budget, consider calling your creditor and asking to move the due date back until later in the month.
Consider setting up automatic deposits for your paycheck or benefit checks into your checking account. Direct deposit could give you faster access to your money and potentially help you avoid overdrafting your account if unexpected transactions occur before you have time to deposit your next check.
Maintain a buffer in your checking account
Another way to keep overdrafts to a minimum is to store extra cash in your checking account — also known as a checking account buffer or cash reserve.
A checking account buffer can serve as a financial safety net to protect you in several potential ways. Keeping extra funds (above your regular monthly expenses) in your account may not only help you avoid overdraft charges, but it could also help you cover unexpected emergencies and avoid minimum balance fees.
Read more: How much money should you keep in your checking account?
Many financial institutions offer customers the ability to sign up for text or email bank alerts when their balance falls below a certain threshold. Setting up low balance alerts may empower you to take action (possibly by transferring money from a savings account) until your next paycheck arrives to avoid overdrafting your account.
If you sign up for overdraft coverage through your bank or credit union, it’s important to treat the service as a backup. Ideally, you should only rely on overdraft coverage in financial emergencies.
When your account goes into the negative and your overdraft coverage kicks in, your bank may charge you a fee for each transaction it covers. Those costs can add up quickly. Plus, overuse of overdraft coverage could lead to bigger issues, like account closure, if the situation gets out of hand.
Yes, you do have to pay back overdrafts. When you overdraft your account, you’re essentially borrowing money from your bank or credit union to cover a transaction, even if it’s just a few dollars. The money you borrow becomes a negative balance in your checking account. And your financial institution will expect you to repay those funds, plus any fees it charges you for the overdraft coverage.
An overdraft fee is a charge your financial institution applies when you spend more money than you have in your account, and the bank or credit union covers the transaction. In some cases, a bank may transfer your own money from a linked deposit account to cover a transaction and still charge you an overdraft fee.
Typical overdraft fees cost around $35 but vary between financial institutions. If you want to avoid overdraft fees, let your bank know that you want to opt out of overdraft coverage.
