What Does Overdrawn Mean? The High Cost of an Overdrawn Bank Account

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Just receive a scary notice form your bank and wandering what does overdrawn mean? Let’s get right to the definition:

Overdrawn means more money was taken from your account than you had available. This means you have a negative bank account balance.

So, what happens when an account is overdrawn?

Well, this depends on the type of overdraft protection your account has. In many cases, you’ll be charged an overdraft fee for every transaction that takes your account from positive to negative. Let’s say you’re grabbing a $4 Starbucks coffee on the way to work. Since the average overdraft fee is $35, this means you’ll need to pay for your coffee ($4) plus an overdraft fee ($35).

Yep, that coffee just cost you $39.

Worse still, any other transaction you make when your account is overdrawn will cost you an additional $35. This means your bank can charge you more than $100 in overdraft fees in a single day if you make transactions with your debit card or check.

But just because you can overdraw your bank account or overdraw your debit card doesn’t mean you have to. Read on to master your money and unlock a few options to pay less in fees without robbing yourself of the cash you need.

What we’ll cover:

You can avoid bank overdrafts by NOT opting into overdraft protection

Overdraft protection is an optional service that prevents your transactions from being rejected (typically debit card purchases, ATM withdrawals and checks) when you don’t have available funds.

Although overdraft protection sounds like a positive, it actually means you’re giving your bank permission to overdraw your account (and pay a $35 overdraft fee per transaction). To avoid overdrafting, you can decide to not opt-in for overdraft protection in the first place. 

By default, you shouldn’t be enrolled in an overdraft protection service without your permission. In fact, there is a range of laws in place to protect you from deceptive or unfair overdraft coverage.

young couple stressing about money

What are the overdrafting laws?

In 2010, the Federal Reserve declared that banks must reject transactions if an account lacks sufficient funds

As a customer, you can choose to opt-in to overdraft coverage (if your bank offers the service). This means your transactions may be approved without sufficient funds, and the bank may charge overdraft fees.

It’s worth noting this law ONLY applies to transactions that are not pre-authorized. These include ATM withdrawals or debit card swi[es. Pre-authorized withdrawals including automatic bill payments and checks are not included in the overdraft protection law and can lead to overdraft charges. These are also known as nonsufficient fund fees, insufficient fund fees or NSF fees.

But wait, there’s more!

The Overdraft Protection Act of 2021 was introduced to improve the transparency of overdraft programs for US consumers. This bill makes it illegal for banks to be deceptive or unfair about their overdraft coverage. As a customer, you’re entitled to information about overdraft coverage fees, whether a transaction could be declined through insufficient funds, and whether fees will be charged for declined transactions.

Is an overdrawn account negative or positive?

This really depends on your situation. 

An overdraft occurs when your account balance goes negative. You’re spending money you don’t have, which incurs further fees that draw your account even further into the negative.

But (there’s always a but), accessing emergency funds when you’re short on cash can be a life-saver whether you’re covering an urgent bill to avoid late fees or covering your rent when payday is around the corner – so that might be a positive outcome for you.  

For many Americans, an overdrawn bank account means a little wiggle room and financial freedom in emergencies. If you’ve thought to yourself “I need a loan but I’ve got bad credit“, online lenders will probably be a better solution as they offer larger amounts and are less expensive. But for smaller sums, we recommend checking out the top cash advance apps of 2022 to see if there’s a good fit for you.

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What does overdrawn mean on a debit card?

Almost 60% of US consumers prefer to use a card over cash.

If you’re one of them, you may want to opt-in to overdraft protection to enable overdrawing your checking account when you swipe your card. If your debit card is linked to a checking account that allows overdraft, then you can overdraw your debit card. All you have to do is swipe your card at the supermarket, bar, or restaurant and if you don’t have sufficient funds when you’re paying for a good or service, your account will be overdrawn automatically.

The other way checking accounts are overdrawn is with an overdraft check. In this case, you just need to make sure that you have opted-in for overdraft protection. Then, you can write a check as long as you stay within the limit of what was defined by your bank.

debit card on laptop

What should you do if your bank account is constantly overdrawn?

An overdrawn bank account can help you out of a sticky situation but should serve as a warning for you if you find yourself constantly overdrawn (and paying sky-high overdraft fees). 

These are the 4 steps you should take to mitigate the risk of escalating the situation:

Step 01: Stop using your account until you get back to positive

Step 02: If you can, freeze your recurring expenses such as Netflix or Disney+

Step 03: Try to go back to a positive balance ASAP. Banks will charge you extra fees if you are negative for too long. At some point, they can freeze your account and put you on a blacklist to prevent you from opening a checking account at any bank.

Step 04: Call your bank and try to find a solution that will be convenient for everyone

Final thoughts and what to do next…

Let’s be honest, it’s very easy to use overdrafts. Just swipe your debit card or hit the nearest ATM and you can enjoy a cash advance when you don’t have enough cash in hand. And with a fixed fee for every transaction you make, you’ll know what you owe and when.

But convenience comes with a price.

Overdraft fees are expensive and usually do not reflect the real cost for your bank (they charge you outrageous amounts because they can). Overdrafting often can also lower your credit score and can have an overall negative impact on your financial life.

So, now you have an overdrawn definition it’s up to you to decide if the service is positive or negative for you. If you want to access the funds you need without paying overdraft fees, check out our latest resources below:

Watch: What does overdrawn mean?

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Mitchel Harad
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