Understanding Overdraft Fees & Protection: What to Do When You're Overdrawn

If your bank account is overdrawn, it means you've spent more money than you have available in your account. Your bank will notify you of your overdraft status, and depending on the bank and the provisions you have in place, you may be charged a fee for insufficient funds for each financial transaction that exceeds your balance.

What Happens When Your Bank Account Is Overdrawn

Overdraft Protection

Some banks offer overdraft protection plans to qualified customers. This allows you to exceed your bank balance up to a certain predetermined dollar amount before incurring any additional fees. Typically, a bank will charge you moderate interest on your overdraft balance and require that the balance be paid down, as with any other type of credit line.

Overdraft Fees

If you don't have an overdraft protection plan in place — say, a savings account linked to a checking account — your bank will likely assess a fee for each individual insufficient funds transaction you make, whether that's an automatic payment from a savings account; an automated teller machine, or ATM, transaction; or a bounced check. Fees typically range from $40 to $60. If, for example, you write four checks that exceed your checking account balance, and your bank charges $40 per overdraft, you will be assessed a $160 penalty. The fees cover the bank's cost for honoring the transactions you made so the checks aren't returned by vendors.

Time Frame for Overdrafts

Some banks will consider your account overdrawn the moment they process a transaction with insufficient funds. Others will give you a 24-hour window to put additional funds into your bank to cover your purchases. Know your bank's policies. If you have online banking services and sign up for overdraft email or text alerts, you may be able to catch an overdrawn account quickly and fix the situation before your fees add up.

Long-Term Overdrawn Account

While every bank has its own rules regarding overdrawn accounts, most stipulate a specific period in which you must bring your account current to avoid incurring additional penalties. You may be subject to an additional fee once your overdrawn account reaches a certain dollar amount. Failure to pay an overdrawn account can result in loss of banking privileges, a closed account and collection efforts.

Impact of Overdrafts

Even if your account is closed due to being habitually overdrawn, you are still responsible for repaying your outstanding balance and fees. You may find it difficult to open another bank account before addressing your delinquent one. Any outstanding checks you've written on the account will be returned without payment, and any automatic withdrawal agreements you have in place for automatic bill payment will be denied.

Avoid Overdrawn Accounts

Regularly monitor your banking activity to ensure you don't inadvertently overdraw your account. Balance your checkbook, chart savings activity, check your statements online and keep a ledger for ATM deposit and withdrawal slips to track your spending. If you have a good relationship with your bank and your overdraft was an oversight, the bank may be willing to waive your fees.