Sometimes, there just isn’t enough money to go around. And if you don’t keep a close eye on your checking account, you may accidentally — or intentionally — overdraft and spend more money than you have available. For this reason, it’s important that you understand how to pay an overdraft.
If you sign up for a service called Overdraft Protection, you can possibly avoid overdrawing your account and paying overdraft fees. With this service, you can link a savings account or credit card to your checking account. In the event that you don’t have sufficient funds in your account to cover a transaction, the bank will transfer money from your savings or use your available credit to cover the purchase.
On the other hand, if you overdraft your account and you’re not signed up for Overdraft Protection, the bank may advance the cash to make a purchase happen (and charge an overdraft fee). This is known as “overdraft coverage,” and you can opt-in for this service at anytime. You must pay back this money plus fees. Overdraft fees range from $30 to $35 per item.
The good news is that overdrawing your bank account isn’t the end of the world. Here’s what you need to know to handle this situation.
It’s important to sign up for online banking and check the status of your checking account every day. This way, if an overdraft occurs, you can learn about it earlier in the day and deposit the necessary cash into your account to cover the overdraft.
When an account goes into the red, most banks give their customers up until the end of the business day to deposit or transfer funds into their account and avoid an overdraft fee.
The longer your account stays in the negative, the more money you’ll end up owing the bank. Some banks also charge additional fees when accounts remain overdrawn for too long. If you don’t have money to cover an overdraft, look into getting a short-term loan from a relative or friend.
Another option is to set up a plan with your bank and pay back the overdraft over the next several days or weeks.
As a side note, consider signing up for Overdraft Protection once you’ve paid an overdraft. This can reduce the likelihood of future overdrafts. You can even ask the bank to waive some of the overdraft fees, which can make it easier to pay what you owe.
There’s no specific time frame for paying an overdraft, but the sooner you bring your account back into the positive the better.
Bank policies vary. With that being said, some banks charge customers additional fees when their account remains overdrawn for a certain length of time. For example, BB&T charges an additional $36 when an account remains overdrawn for seven days. Similarly, PNC Bank charges a $7 fee for each day an account remains overdrawn for more than five consecutive days, and this fee doesn’t cap until you hit $98.
These extra charges can put you further in the hole, making it harder to get your account out of the red.
If you don’t communicate with your bank and you allow your account to remain overdrawn for an extended length of time, the bank may close your account after 60 days and report you to ChexSystem.
This is a consumer reporting agency that banks use to determine the potential risk of those who apply for bank accounts.
Once you’ve been reported to this database, it will be difficult for you to open another bank account for at least the next five years. From a financial institution’s standpoint, if you didn’t pay an overdraft at another bank and left your checking account in bad standing, you may repeat this behavior at another bank.
Given the potential financial ramifications of an overdraft, it’s important that you take measures to avoid one in the first place.
One of the best ways to avoid an overdraft is to closely monitor your bank account on a regular basis, preferably every day. This way, you can keep tabs on your available balance, deposits, checks, automatic payments, debit card transactions, transfers, and other transactions.
It’s also important that you keep a checkbook register and record any checking account transactions like debit card purchases, ATM withdrawals, and written checks, or else you could forget about a purchase and think you have more cash than you actually have.
If you sign up for automatic bill pay, set up monthly recurring reminders to ensure you have enough cash in your checking account to cover these transactions. As a rule of thumb, aim to maintain a cushion in your checking account, too.
This doesn’t have to be a lot of money. Even if it’s only $50 or $100, this might be just enough to keep your account out of the red — just in case you forget to record a small purchase.
The worst thing you can do is ignore an overdraft. This problem won’t go away on its own. And if you don’t pay what you owe, you might be unable to get another checking account. Plus, skipping out on your debt damages your relationship with the bank and digs a deeper financial hole.