What happens when you overdraw your account

When you spend more money than you have in your account, your bank can either decline the transaction or allow it to go through and put your account into negative balance. If the bank allows it, you now owe the bank money—this is called an overdraft. The bank charges you a fee for this service, usually between $25 and $35 per transaction, though some banks charge more. You are responsible for paying back the negative balance plus all overdraft fees.

The bank does not have to let you overdraw. Many banks offer overdraft protection, which is a choice you make when you open your account or later. With overdraft protection turned on, the bank will cover transactions that would otherwise bounce. Without it, the transaction simply fails and you pay no fee—but the payment does not go through, which can cause problems with the person or company you were trying to pay.

Overdraft fees add up fast. If you overdraw multiple times in one day, you can be charged multiple fees. Some banks charge one fee per day regardless of how many transactions overdraw your account; others charge per transaction. Check your account agreement or call your bank to know which rule applies to you.

Key Takeaways

  • Overdraft fees typically range from $25 to $35 per transaction, and multiple overdrafts in one day can result in multiple fees.
  • You can turn overdraft protection on or off in your account settings, and the choice determines whether transactions are declined or allowed to go negative.
  • Overdrafts are reported to ChexSystems, a banking history database, and repeated overdrafts can make it harder to open accounts at other banks.
  • If you cannot pay back an overdraft within a reasonable time, the bank may close your account and send the debt to a collection agency.
  • Some banks offer overdraft grace periods or fee waivers for first-time overdrafts, so calling your bank immediately after overdrawing may reduce or eliminate the fee.

How overdraft protection works

Overdraft protection is a feature you control. When you set up a checking account, the bank asks whether you want overdraft protection. If you say yes, the bank will cover transactions that would otherwise fail. If you say no, transactions that exceed your balance are simply declined—no fee, but also no payment sent.

Some banks link overdraft protection to a savings account or credit line you already have. If you overdraw your checking account, the bank automatically transfers money from your savings to cover it, or charges the overdraft to a credit card or line of credit. This is less expensive than an overdraft fee if the transfer or credit charge is small, but you still pay interest on the credit line and lose access to the savings you transferred.

You can turn overdraft protection on or off at any time through your bank's website, mobile app, or by calling customer service. If you turn it off, future transactions that exceed your balance will be declined. Turning it off does not erase overdraft fees you already owe—those remain your responsibility.

Overdraft fees and how they stack up

A single overdraft fee is usually $25 to $35, but the total cost depends on how many times you overdraw and how long you stay negative. If you overdraw on Monday and do not deposit money until Friday, you may be charged one fee on Monday and another on Wednesday or Thursday, depending on the bank's policy. Some banks charge a daily fee for each day your account is negative; others charge once per day no matter how many transactions overdraw you.

The worst-case scenario is a chain of overdraft fees. Say you have $50 in your account and you make three purchases of $30 each. All three overdraw you. If your bank charges $35 per transaction, you now owe $90 in fees plus the $40 you overspent—a total of $130 for spending $90. This is why overdraft fees are sometimes called a "poverty tax": they hit hardest when you have the least money to spare.

Some banks offer a grace period or courtesy waiver on your first overdraft of the year or your first overdraft ever. This is not may provide—it depends on the bank and your account history. If you overdraw, call your bank immediately and ask whether the fee can be waived or reduced. Banks are more likely to help if you have a good history with them and if you pay back the overdraft quickly.

Overdraft reporting and your banking history

Overdrafts are reported to ChexSystems, a database that banks use to check your banking history before opening a new account. Multiple overdrafts or a pattern of overdrafting can make it harder to open a checking account at another bank. Some banks will deny you outright; others will require you to use a second-chance or basic checking account with higher fees and fewer features.

Overdrafts do not appear on your credit report and do not affect your credit score directly. However, if you do not pay back the overdraft and the bank sends it to a collection agency, that collection account will appear on your credit report and will damage your score.

If you have overdrafted at a bank and want to open an account elsewhere, be honest about it when you apply. Some banks ask directly on the application whether you have had overdrafts in the past. Lying on the application can result in account closure and potential fraud charges.

What happens if you cannot pay back an overdraft

If your account stays negative for more than a few days, the bank will send you a notice asking you to bring your account current. The notice will say how much you owe and by what date. If you do not pay by that date, the bank may close your account and report the debt to a collection agency.

Once a debt is sent to collections, a collection agency will contact you by phone, email, or mail asking you to pay. You are legally required to pay the original overdraft amount, but you may be able to negotiate the collection fees. If you do not respond or pay, the collection agency may sue you in small claims court, and a judgment against you can result in wage garnishment or bank account levy.

If you receive a notice that your account will be closed, contact the bank immediately. Explain your situation and ask whether you can set up a payment plan. Many banks will work with you if you show good faith by making a partial payment or committing to a specific repayment date.

Avoiding overdrafts: monitoring and alerts

The simplest way to avoid overdrafts is to check your balance before you spend. Most banks offer free balance alerts through their mobile app or by text message. You can set an alert to notify you when your balance falls below a certain amount—say, $100. This gives you time to deposit money before you overdraw.

Keep a running total of your spending if you use your debit card frequently. Transactions can take one to three business days to post to your account, so your available balance may be lower than what your app shows. If you are unsure, assume the transaction has already posted and subtract it from your balance.

If you are living paycheck to paycheck and overdrafts are a recurring problem, consider turning off overdraft protection entirely. Yes, transactions will be declined, but you will avoid the fees. A declined transaction is inconvenient; an overdraft fee is expensive. You can always turn overdraft protection back on later if you need it.

Overdraft protection alternatives

If you want protection against overdrafts but do not want to pay per-transaction fees, some banks offer a linked savings account as overdraft protection. If you overdraw your checking account, the bank automatically transfers money from your savings to cover it. You pay no overdraft fee, but you lose access to that savings money and may pay a small transfer fee. This works well if you have savings you can afford to use.

Another option is a credit line or overdraft line of credit. The bank extends you a small credit line—say, $500—that you can draw on if you overdraw your checking account. You pay interest on the amount you borrow, but the interest rate is usually lower than an overdraft fee. This is useful if you overdraw occasionally but can pay back the borrowed amount quickly.

A third option is to use a prepaid card or secured credit card instead of a checking account. These cards only let you spend money you have already loaded onto them, so overdrafts are impossible. The tradeoff is that you lose access to some checking account features like bill pay and direct deposit, and you may pay monthly fees.

Frequently Asked Questions

Can a bank charge me multiple overdraft fees in one day?

Yes. Some banks charge one fee per transaction that overdrafts you, so three overdrafting transactions in one day means three fees. Other banks charge one fee per day regardless of how many transactions overdraft you. Check your account agreement or call your bank to find out which rule applies to your account.

What is the difference between overdraft protection and overdraft fees?

Overdraft protection is a feature you turn on or off that allows transactions to go through even when your balance is too low. Overdraft fees are the charges the bank levies when you use that protection. You can have overdraft protection without paying fees if you link it to a savings account or credit line instead of using the bank's overdraft service.

Will an overdraft hurt my credit score?

An overdraft alone does not appear on your credit report and does not affect your credit score. However, if you do not pay back the overdraft and the bank sends it to a collection agency, the collection account will appear on your credit report and will lower your score.

Can I dispute an overdraft fee?

Yes. Call your bank and explain why you believe the fee is unfair—for example, if you were not aware overdraft protection was on, or if the fee was charged in error. Banks sometimes waive fees for customers with good account history, especially if it is your first overdraft. There is no harm in asking.

What happens if I close my account with an overdraft balance?

Closing your account does not erase the debt. You still owe the bank the overdraft amount plus any fees. If you do not pay, the bank will report it to a collection agency, and the debt will follow you. Pay the overdraft before you close the account, or contact the bank to arrange a payment plan.