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Negative Bank Account Balance: What Happens Next?

Negative Bank Account Balance: What Happens Next?
Jacqueline DeMarco
Jacqueline DeMarcoUpdated January 31, 2023
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Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.
A negative bank account balance often leads to bank fees. If you don’t deal with the negative bank balance promptly, those fees can pile up month after month. Worse yet, your credit score may sink or the bank may decide to close your account.  You can keep the relatively small problem of a negative balance from growing into a bigger one by addressing it as soon as possible. Read on to learn what happens if your bank account goes negative and how you can avoid this problem in the future.

What Is a Negative Bank Account?

A negative bank balance occurs when the account holder pays out more money than they have in their account. As a result, the balance drops below zero. This is known as an overdraft. Sometimes the bank will process a transaction even though the account has a shortfall. If this happens to you, the bank pays out whatever funds are in your account and effectively lends you the rest of the money to cover the payment. Your account will have a negative balance, and you will probably be charged an overdraft fee. If your account balance is too low, the bank may refuse the transaction altogether. That will cause your check or other payment to bounce, but it won’t necessarily put your account into a negative balance. However, many banks will charge you a non-sufficient funds (NSF) fee. Recommended: Guide to High-Yield Savings Accounts

How Does a Negative Bank Account Balance Happen?

Negative bank balances usually occur by accident. For example, someone might overdraw their account if they:
  • Lose track of how much money is in the account
  • Forget about a recurring auto-payment 
  • Overlook the deduction of monthly maintenance fees
  • Transfer money out of the account without updating their records
  • Pay out of a joint bank account without knowing another account holder had spent some of that money 
Any method of payment — including check, debit card, and electronic funds transfer — can result in a negative bank account. Recommended: What Is Zero-Based Budgeting?

Negative Bank Account Consequences

Having a temporary negative bank account balance isn’t the end of the world, but  account holders do risk consequences. 

Overdraft Fees

When a bank customer overdraws their account and the bank covers the shortfall amount, the customer must pay the bank back. They’ll probably also face an overdraft fee ($35 is typical). Depending on the bank’s overdraft agreement with the customer, it may or may not continue covering overdrafts. Regardless, while the account balance is negative, the bank can charge another overdraft fee for every additional transaction. On the flip side, if the bank denies a transaction because the account lacks the money to cover it, the customer may incur a non-sufficient funds (NSF) fee. NSF fees tend to cost about the same as overdraft fees, but at least no negative bank balance will ensue. Recently, in an encouraging trend, many banks have taken steps to lower overdraft and NSF fees or phase them out entirely.  

Account Closure

After paying any overdraft or NSF fees, the bank customer needs to deposit enough money into the account to fix the negative balance. Otherwise, they risk the bank closing their account. How long can a bank account balance be negative before closure? That depends on the bank’s policy. Account documents or the bank’s website should have this information.

Debt Collection 

If a bank closes an account because of a large negative balance, it may also send the debt to collections to try to recover the money. Paying off the debt to the bank quickly will usually be less stressful than dealing with debt collectors and debt settlement

Impact on Credit Score

If a bank closes someone's account because of multiple overdrafts and a large negative balance, it may choose to report the unpaid balance to the three main credit bureaus (Experian, TransUnion, and Equifax). That debt information may cause the credit bureaus to lower the account holder’s credit score. 

Being Denied Future Bank Accounts

The bank may also deny customers with a difficult account history the chance to open new accounts in the future. If the bank alerts a checking-account reporting company, the company can hold onto the information for seven years. When other banks see that information in the companies’ reports, the customer may have a harder time opening a new bank account. The new bank may decide to charge the customer higher banking fees and impose more restrictions (such as a lower limit on daily withdrawals).

Avoiding Negative Balances  

Consumers can take various steps to avoid negative bank account balances. Banks and credit unions commonly offer tools and procedures to help with this. 

Overdraft Protection

Many banks offer a type of overdraft protection in which the customer chooses to link their checking account to a backup account. The backup may be another checking account or a savings account. That way, if the customer overdrafts, the bank can take the needed money from the secondary account. This process usually results in a small fee. Avoid using a credit card as a backup account. Any funds charged to the card could be processed as a cash advance, triggering added fees or higher interest on that sum. 

Emergency Savings

Overdraft protections require the backup account to contain enough money to cover shortfalls. A separate account containing emergency savings, if you have one, could meet that need. 

Tracking Spending

You can also avoid a negative bank balance by carefully tracking your spending. Many banks offer to send you text or email alerts when an account balance is low. These alerts can help you remember to check balances and account movements. Doing so once a week may make it easier to stick to a budget. 

The Takeaway

The best way to deal with negative account balances is to face them head-on. In addition to depositing enough money to cover the deficit, you may have to pay overdraft or NSF fees. Restoring a positive account balance as soon as possible can help you avoid more severe consequences like a closed account or a damaged credit score. 

3 Money Tips

  1. Because online banks don’t have the overhead costs that brick-and-mortar banks have, they may offer a higher savings account interest rate. Just keep an eye out for minimum balance requirements and monthly fees.
  2. An emergency fund is a key financial safety net. Aim to have three to six months of living expenses tucked away in a separate account that earns interest, but allows you to access the money if needed (such as a high-yield savings account). In some situations, it may be appropriate to have up to 12 months of living expenses saved.
  3. To get into the savings habit, consider having 10% of your paycheck directly deposited into your savings account. Or, set up a small automatic recurring transfer from your checking account into your savings account on the same day each month.
Lantern can help you compare online savings accounts and find today’s best rate.

Frequently Asked Questions

How long can your account balance be in the negative?
How can you clear a negative bank account balance?
What are the consequences of having a negative bank account balance?
Photo credit: iStock/photoman

About the Author

Jacqueline DeMarco

Jacqueline DeMarco

Jacqueline DeMarco is a personal finance writer and editor based in Southern California. While she spends the bulk of her time writing about complex financial issues, she also tackles a variety of subjects ranging from food to fashion to travel. Her work can be found across dozens of publications such as Credit Karma, LendingTree, Northwestern Mutual, The Everygirl, and Apartment Therapy.
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