What happens when we overdraft? How much more money can we take out of our checking accounts than we have in them? Is it smart to use overdrawing your account as a sneaky way of getting a zero interest personal loan?
Overdrafting your account can actually be a smart decision.
This article will answer the question, How much can I overdraft my checking account? Plus…
- Can I cash a check if my account is overdrawn?
- Does a checking account overdraft affect credit?
- Can you overdraft a savings account?
- What happens if you overdraw your checking account?
- How many overdrafts can you have?
- What is it like to have a negative account balance?
- How can I get an overdraft fee forgiven?
Whew. Having a negative bank account takes a lot of explaining.
What Is an Overdraft and Can You Overdraft a Savings Account?
An overdraft is what occurs when you withdraw from an ATM, write a check, or make a debit card or electronic payment without sufficient funds in your account. Your bank will enter a negative balance and will become “overdrawn”. Or the bank/credit union will reject your payment request.
Overdrafts are talked about in conjunction with checking accounts. Can you overdraft a savings account? No, you can’t overdraw a savings account. If you do attempt to go into the red, the bank will simply reject your transaction request.
What Happens if You Overdraw Your Checking Account?
What happens when you overdraft is that you’ll be hit with an overdraft fee. That usually shows up on your statement as a NSF fee (non sufficient funds). Your withdrawal attempt will either be rejected or accepted if the negative account balance won’t be too large…
How Much Can I Overdraft from My Checking Account and What Is the Average Overdraft Fee?
The question of “How much can I overdraft?” has a unique answer for each person. The average overdraft limit in the US is between $100 and $1,000. The average overdraft fee is $27.
Again, banks/credit unions assess each overdraft on a person to person basis. For instance, if someone has always been a good customer (they have a mortgage, rarely overdraft, longtime customer, etc.) the financial institution may go ahead and allow a large overdraft. But if someone continually overdrafts, doesn’t have much in savings and isn’t really looked upon as a valuable customer, the bank will often reject any and all overdrafts. This means those customers will usually not be able to overdraw any money from their account but will still get hit with a fee.
Furthermore, if a bank sees that you’ve overdrawn just a day or two before payday, they will usually let your overdraft transaction come through. Your account will go in the negative. Then, once your paycheck enters your account, the bank will take that money before you have access to it.
It’s generally not a good idea to overdraft your account as a way of getting a person loan. Though if you can’t use a credit card and need a little fast cash, it is worth calling the bank and explaining the situation. Most banks will allow your account to dip below zero.
Can I Cash a Check if My Account Is Overdrawn?
Yes, you can cash a check if your account is overdrawn. BUT you may not get the full amount. What will happen is the bank will see your balance is in the red. Therefore, the bank will take its share of the check before releasing the rest of the funds. Say your check was for $100. Last week, you overdrew your account by $50. And the overdraft fee at your bank is $27. This means you have a negative bank account of $77. The bank will take its $77 upon cashing your check. You will then be given the remaining $23. So yes, you can cash a check if your account is overdrawn but the bank will take what they are owed first. This is even true if you use a check cashing place other than your bank. All check cashing places check with the bank first to check your account standing. Everyone looking at your account will know it’s a negative bank account.
How Many Overdrafts Can You Have?
The number of overdrafts you can have varies by bank. The daily limit is usually 3-4 and there is usually no annual limit. Banks set an overdraft limit as a courtesy so you don’t get hit with ten overdraft fees all in the same day.
Does an Overdraft Affect My Credit Score?
An overdraft typically will not affect your credit score. If you do overdraft, you should clear it as quickly as possible. Because simply having an overdraft won’t affect your credit score, providing you clear the debt before it goes to collectors – i.e., your bank sends an agency to recover the money you owe them.
If you don’t repay your overdraft, the collection will affect your credit score, but the outstanding balance itself won’t. So “Does an overdraft affect my credit score?” No but collections do. In general, don’t worry about a few overdrafts here and there affecting your credit score. Just pay back the money within a month.
Can I Still Withdraw from an Overdrawn Account?
Yes, providing you aren’t at limit. If you are overdrawn but you need to make another payment, you can overdraft at an ATM or another method. Your overdraft will be an arranged limit and you can withdraw up to it, be it in one go or in several smaller transactions. Remember, the average overdraft fee is $27. If you overdraft four times, that’s over $100 out the door.
How to Avoid an Overdraft
Having a negative bank balance is not the end of the world. Many people fall into a negative bank bank account balance many times throughout the year. Though it is a form of debt and can have implications for your financial health. So if you’re one of the ones who dread entering an overdraft, we’ve rounded up our top tips and advice for steering clear of the red.
Top Tip: If you only overdraw your checking account a few times per year, chances are that you can get your overdraft fees waived. Many people do this with great success. Call your bank/credit union and tell them you messed up. Ask for the NSF fee to be wiped from your account. Small banks and credit unions are especially willing to do this service. They want to keep you happy. But if this doesn’t work for you, read on…
1. Non Sufficient Funds Transfers
In some circumstances, your bank may issue what’s known as a non sufficient funds transaction (sometimes known as an insufficient fund transfer). This is where the bank will return the transaction unpaid to keep you from having a negative bank account. However, you will generally pay a fee for the privilege, which an FDIC study found to be an average of $5. This will help you from getting hit with $27 overdraft fees. BUT it can also mean you get hit with late fees if your bills aren’t paid on time.
2. Protection Programs
Nearly all banks offer some sort of protection against overdrafts. The protection comes from a separate account that is linked specifically to your checking account (like a savings account), which can be set up to automatically transfer funds should you otherwise have a negative bank account. However, you will need to have sufficient funds in your linked account to transfer to your checking account. Ask your bank about ‘overdraft protection’.
3. The Foolproof Way
Many people never ask, “How much can I overdraft?” That’s because the best and most sensible way to avoid a negative bank account is to never spend more money than you have. It’s hard sometimes because a new set of car tires or repairs to your house can happen unexpectedly. But with willpower and a spreadsheet or two, you can keep track of your expenses to make sure you always have an adequate bank balance for regular bills.
Online banking makes this really easy – set up email or text alerts for deposits and withdrawals. These pings can even let you know when you’re nearing your balance limit or about to become overdrawn so you can make prior arrangements.
Advantages of an Overdraft
- Emergency money when you need it most.
- Flexible, simpler and less formal than a personal loan and can be cheaper than using a high interest credit card.
Disadvantages of an Overdraft
- Answering the question of, “How much can I overdraft?” isn’t a simple answer and that means overdrafting yourself is a little complicated. These complications mean using a negative bank account balance is hard to pull off.
- Overdrafts are regularly reviewed by the bank and the limits can change – using a negative bank account balance can work but since policies change, it’s best not to count on it each time you’re in a pinch.
- The cost – overdraft fees are expensive.
- A risk of interaction with debt collectors because of having a negative bank account – it’s the same as owing a creditor money.
- You cannot overdraft a savings account.
- Having a negative bank account fairly often who harm your relationship with the bank – perhaps making it harder to get loans.
Really, an overdraft should only ever be a temporary measure. If you find you are frequently in your overdraft or struggling to keep track of your account, contact your bank to get overdraft protection, etc. Better yet, use budgeting software like Personal Capital help you keep conveniently track your spending and keep your bank balance in the green. But remember above all if you do enter your overdraft, don’t panic, just fix the situation when you can.
Knowing how much you can overdraft is a smart thing to know. So, “How much can I overdraft my checking account?” It depends but never very much.