Most of us know that feeling when we check our bank accounts and are stressed by how little we see there. But for some people, that stress takes on a whole new level when they realize they've withdrawn more money than they had to their name in the first place. This is known as an overdraft, and it can get pretty costly, especially if you don't know how your bank handles them.
Fortunately, with a little bit of knowledge and a decent strategy in place, you can reduce your risk of costly overdraft fees and maybe even avoid them altogether.
How bank overdrafts work
Overdrafts are when you withdraw more money from your account than you had in there to begin with. Banks typically handle these in one of two ways. The standard way is to deny any withdrawal attempts if you don't have the funds in the account to back it up. Say you try to use your debit card to make a $50 purchase when you only have $20 in your account. Usually, your card will get declined and you'll need to find another way to make that purchase.
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But sometimes you really need the money and you know you'll have some coming in soon. That's where overdraft protection could be helpful. If you opt into this, your bank will approve your transaction, even though you don't have enough money in your account right now. But as a consequence, it may also charge you a per-transaction fee for every transaction you make that pushes your account into the negative.
That's where overdrafts can become really dangerous. They cost around $35 on average. If you don't realize you've overdrawn your account and make several purchases, you could easily wind up with hundreds of dollars in overdraft fees in a single day. And some banks charge additional daily overdraft fees for each day your account remains in the negative.
If you fail to pay back your overdraft fees in what your bank considers a reasonable amount of time, it could even close your account. Then, it'll likely report you to ChexSystems. Banks look at your ChexSystems report when deciding whether to give you a new bank account, and if your report shows a failure to pay fees, you may have trouble obtaining a new bank account in the future.
What to do if you owe overdraft fees
Owing overdraft fees is no fun, but it might not be as big of a deal as you think. Some financial institutions are willing to waive overdraft fees if you simply call and ask. Explain what happened and highlight your long history as a customer if appropriate. Then, request a refund. Banks are under no obligation to do this, but they might if they want to keep your business. However, this may not work for you if you routinely incur overdraft fees.
If your bank denies your request, you'll still be on the hook for the fees. You may have to budget a portion of each paycheck until you've paid it off if you want to avoid account closure and the negative mark on your ChexSystems report.
You may also want to explore moving your money to a different bank account that doesn't charge overdraft fees or caps the daily overdraft fees it charges. You can find this information by either contacting the bank or viewing the fee schedule for the account you're considering. This should be available on the bank's website.
If you don't want to worry about overdraft fees going forward, consider opting out of overdraft protection going forward. This way, your bank won't be able to charge you fees for one-time debit card or ATM withdrawals that exceed your account's current balance. However, you should note that banks can still charge you fees for check and ACH withdrawals that exceed your balance even if you've opted out of overdraft protection. You'll also need a back-up plan for how you'll cover purchases when you're low on cash.
Another option is to keep your overdraft protection and sign up for alerts so you know when your balance is getting low. If you have a savings account at the same bank, you might be able to link the two and set up an automatic funds transfer from your savings account to your checking account as needed so you don't get hit with an overdraft fee.
You can always try one approach for now and then if it doesn't work out like you'd hoped, you can adjust your strategy and try again. And don't be afraid to reach out to your bank with any questions if you're uncertain about how it handles overdraft fees or when you could face charges. The more you know, the better prepared you'll be.
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FAQs
Answer: Here's how that works. When you do not have enough money in your account, the bank decides whether it will pay or return an item based on your overdraft elections. An overdraft occurs when you don't have enough money in your account to cover a transaction and the bank pays it.
What happens if I spend more money than I have in my bank account? ›
However, your bank may refuse your purchase if it will overdraw your account. If you do opt-in for overdraft protection or coverage, then your bank may pay a debit card purchase or ATM transaction, even if the transaction overdraws your account. You will be charged any overdraft fees that are incurred as a result.
What happens when you spend more money than you have? ›
Spending more money than you earn can lead to several negative consequences, including debt accumulation, financial stress, reduced savings, damage to your credit score, limited financial flexibility, strained relationships, delayed financial goals, a lower quality of life, difficulties in retirement planning, and even ...
What happens to your bank balance if you spend more than you bring in? ›
Therefore, if you try to spend more than is in your account using your debit card, or if an automatic payment is set to come out and you don't have enough available funds to cover it, your bank may charge you an overdraft fee.
What happens if you spend more than you have in your account without overdraft protection? ›
First, your debit or credit card may be declined. You won't be charged a fee, but your transaction won't process. Second, non-electronic charges like checks may incur a non-sufficient funds (NSF) fee. The check won't be processed, but you will incur a penalty that is similar to an overdraft fee.
Is it illegal to keep money accidentally put in your account? ›
No, you cannot keep money that is deposited in your account in error. You should alert your bank immediately and have the funds redirected to their rightful owner.
Can I keep money sent to me by mistake? ›
So the general rule is that you cannot keep money sent to you in error. However, there are two exceptions to this rule that can be used as a defence if you are taken to court for spending money sent to you in error. These are known as 'change of position' and 'good consideration'.
What are the consequences of spending too much? ›
Spending money on things we don't need or can't afford is a bad habit that can lead to a dangerous financial situation. Overspending can lead to dissaving, which is when we spend more than we save, which can cause negative effects on our future financial stability.
What is it called when you spend more money than you have in your account? ›
An overdraft allows you to spend more money than you have in your bank account - up to a limit agreed with your bank. You only pay interest on the overdraft money you use.
How to stop ADHD spending? ›
Adults with ADHD are prone to overspending, especially during the holidays. Willpower alone can't stop it. Instead, take five minutes a day to write down who you are buying for, and set a cap for how much you will spend. Record your feelings when you make certain purchases.
Yes, banks have debit card limits for how much you can spend or how much money you can withdraw at an ATM. Daily purchase limits can range from $300 to $10,000. Daily withdrawal limits for debit cards can vary from $200 to $5,000.
What happens if I spend more than my available balance? ›
What happens if I spend more than my available balance? You might overdraw your account if you spend based on your current balance, which excludes pending purchases. If you've opted in for overdraft protection, your financial institution can cover shortages on your checking account typically for a fee.
How much money is too much to keep in one bank? ›
How much is too much cash in savings? An amount exceeding $250,000 could be considered too much cash to have in a savings account. That's because $250,000 is the limit for standard deposit insurance coverage per depositor, per FDIC-insured bank, per ownership category.
Is it OK to always be in overdraft? ›
Overdrafts can be useful for some people. They can help you avoid fees for bounced or returned payments. These happen when you try to make a payment but your account doesn't have enough money in it. But overdrafts should only be used for emergencies or as a short-term option.
Can I overdraft my account by $1000? ›
Your bank might offer you an overdraft line of credit that you can draw against. Say you have a checking account and the bank grants you a $1,000 overdraft limit. That means you can spend all the money in your account, plus up to $1,000 more before the bank will block any further transactions.
Will my card decline if I have overdraft protection? ›
This means that your debit or ATM card may be declined if you don't have enough money in your account to cover a purchase or ATM withdrawal at the time you attempt a transaction. However, it also means you won't be charged an overdraft fee for these transactions.
What happens if a bank overpays you? ›
Suppose an extra $500 is mistakenly deposited into your checking account and you don't notice it. If the bank discovers the error, they can withdraw the funds without your permission, freeze your account or place a hold on the funds.
What happens if you overdraw your checking account? ›
You can't get in trouble for overdrawing your account but you may face fees, which could lead to financial difficulty. Your bank may close your account and may send you to collections until you repay the balance.
How long can my bank account be negative? ›
In general , banks will give you a grace period of a few days to cover the negative balance before taking action . However , if you consistently maintain a negative balance or exceed your overdraft limit , the bank may close your account .
