The short answer is: you will pay outrageous overdraft fees! This article will concisely explain what happens if you overdraw your checking account. We will also cover the reasons it happens, and how much it will cost you.
As you may already know, you will have an overdrawn bank account when you try to spend more money than you have in your balance. This could happen when you pay an automatic bill, write a check, or even simply try and buy a cup of coffee without sufficient funds. Additionally, it can also happen with an ATM withdrawal, or when you buy something with your debit card. If you want to learn more about how overdraft works, you can read more about it here: How Does an Overdraft Work?
The name “overdraft” refers to the transaction that causes your balance to become negative. Then bank can either lend you the money and charge you an overdraft fee, or decline the transaction. If they decline the transaction it is called NSF or “non sufficient funds”.
Now that we know the basics, let’s take a deeper look into what happens when you overdraw your checking account.
Most banks charge a fee for overdrafts and for NSF transactions. However, the fee structure and details vary depending on the bank’s policy. For many banks, the fees change depending on how much extra money you try to spend, and your history of NSF transactions and overdrafts. In addition, when your balance is negative for a long time, they can charge you extra fees.
If you come across a situation where your bank refuses a transaction, check, or a payment you make, you are most likely going to pay an “overdraft return fee”. On top of the bank fee, the person or company which you have to pay may also take their own fees. This fee is completely unrelated to the bank. Unfortunately, there’s more… Sometimes, if your account balance is below zero for too long, the bank will permanently close the account. This can prevent you from being able to open a new account at other banks, as they report these cases to each other.
Overdraft protection programs are available at all the big banks. While most banks love to use the word “protection”, each program is quite different. In some banks, it will simply mean that the bank allows you to overdraft your account. At other banks, the programs will actually help you avoid paying high overdraft fees. At TD, their overdraft protection program links your checking account to another account you have in the same bank. For example they might connect your savings account and your checking account. Whenever your main checking account balance goes negative, funds from your linked account will be automatically transferred to the main account to cover the overdraft. This transfer will also cost you some money, usually around $12. As you can see, without external help, there is no way to avoid fees entirely. However, having a linked account is cheaper than the regular $35 overdraft fee.
Naturally, such a program is only effective if your linked account has sufficient funds to cover both the overdraft and the transfer fees.
In addition, today some overdraft apps are a great solution to overdrafts. Apps like Dave can monitor your bank account and predict whether you are in risk of going into overdraft. When the Dave app predicts a high risk of overdraft, it offer you a $75 interest-free cash advance. The app costs $1 monthly subscription fee.
If you need cash now (because of an emergency for example), you will find many lenders on the market. Make sure you know the terms and rate before you take a loan.
A better protection from overdrafts – keep up with your expenses
There is no easy way to avoid overdraft fees entirely besides being on top of your expenses. Though easier said than done, you should try to spend less than what you make. If this is an impossibility, consider opting out of overdraft protection. That way, if you try to make a payment without having the balance to cover for it, the payment will be declined and you won’t be charged with overdraft fees.