Imagine that you have $500 in your checking account right now. The rent is due, so you give your landlord a check for $550 to make sure you can keep your home for another month.
Now let’s say the bank or credit union decides to honor the check, even though you don’t have enough funds in your checking account to cover the obligation. For a $37 fee, the financial institution processes the money, gives it to your landlord, and puts your account at a negative $87.
When a bank account has a negative balance, the institution is essentially borrowing money to compensate for the gap you’ve created with your spending.
What happens next depends on your actions to eliminate the negative figure.
What Happens When Your Bank Account Closes with a Negative Balance?
Anyone who closes a bank account with a negative balance faces the risk of having the institution report the information to a credit bureau. This issue counts as a past due balance, which can eventually turn into a collection attempt. Sixty points or more could be deducted from the individual’s credit score.
Closing a bank account with a negative balance is the incorrect step to take for your financial situation. This obligation is a debt that will not disappear simply because you’ve told the bank that you no longer want to continue with the account.
The best way to think about this issue is through the lens of a credit card. You’ve already spent the money, which means it is now an obligation for you to repay it.
The only way to get out of repayment is to have the financial institution forgive the negative balance. You can always ask for this solution, but there are no guarantees that it will be provided.
Once you have decided to close your bank account, a negative balance will typically cause the following steps to happen.
- The financial institution will report you to the three major credit bureaus. This information shows as a delinquent account, which significantly drops your score.
- A lower credit score makes it more difficult to obtain credit or lending products now and into the future.
- Any balance transfer, overdraft, or NSF fees will apply to the negative balance.
- Ongoing fees might be charged if the balance remains negative for more than a month. This outcome depends on the terms and conditions you agreed to follow when signing up for the account initially.
The best solution to resolve this issue is to avoid circumstances where an overdraft occurs so that a negative balance exists. If that isn’t possible, try working with the bank or credit union to create a repayment plan that will limit the negative information being sent to your credit report.
If you can pay the entire negative balance now, you can often avoid unwanted account closures or limited access to other banking products.
How Can I Resolve a Negative Balance Right Away?
Most people do not purposely put their bank accounts into a negative balance because of the excessive fees and costs. Why pay $3 above what you have for coffee when you know that another $37 is coming after it?
Many banks will close an overdrawn account automatically to prevent excessive fees and obligations.
You might lose the right to continue having savings and checking products at that specific institution until the debt is handled in a particular way.
When you are ready to resolve a negative balance in your checking account, here are the fastest ways to prevent ongoing financial damage to your credit profile.
1. Instant Money Transfers
If you have money at a different institution than the one where a negative balance exists, try moving the cash to the account that could be overdrawn.
Most banks provide a short grace period with automatic payments to ensure that you have some time to move money around.
When you write a check that is more than what you have in your account, you can put the extra money into it before the bank takes it away to resolve the transaction.
Taking this step makes it possible to prevent overdraft fees, stop overdrafts, and eliminate NSF filings.
2. Make a Deposit
Some people don’t have the option to switch money from one account to another. If you have cash available to deposit, make a quick trip to the bank and speak with a teller about putting money in so that it covers the overdraft.
It is possible to use payday loans and other short-term lending products to cover a negative balance immediately.
Be careful when using that choice because the interest rates on some of these financial products are higher than what you would pay in NSF costs.
3. Pay the Fees
Some people prefer to close their bank accounts because they no longer require them. If you find yourself in this circumstance, pay the accumulated fees to prevent the bank from reporting the negative information to the credit bureau.
When your credit report shows that you have non-payment fees added to a transaction history, it can prevent other banks and credit unions from wanting to open new accounts with you.
Although prepaid cards and other secured funding items would still be available to help you manage your money, it is always better to resolve a negative balance as quickly as possible.
4. Get a Cash Advance
Most credit cards provide the holder with an option to acquire a cash advance. Although the APR on these requests is higher than a standard purchase, it can be a quick way to get money when you need it. Take the funds, go to your bank, and make an immediate deposit.
The interest rate on a credit card is typically better than a payday loan when you have a negative balance at your bank. It’s also much cheaper than paying ongoing NSF fees and other costs.
5. Contact the Merchant
Once you have an idea that a check might bounce, it helps to speak with the merchant or individual who received those funds.
The money gets pulled from their account unexpectedly, which could leave them in a bind – and potentially facing their own negative balance.
If the check or payment is headed to a payment processor, credit card, or another service provider, try asking to change your payment due date.
Most companies prefer it when bills get paid in advance, but they’ll work with you to find a deadline that works with your current paycheck schedule.
You might even save a little money by automatically taking the payments out of the account.
What Happens If I Leave My Bank Account in the Negative?
If you decide to leave your bank account in a negative status, the financial institution has a process called the “Right of Offset” they can implement. They will conduct a review of all your other accounts, and withdraw funds from one that has a positive balance to eliminate the negative balance on the other one.
Financial institutions have the right to extract money from any account where you are listed as the owner. If you are a co-owner on a relative’s or friend’s account, cash could be taken out of them to settle your debt.
State laws are variable regarding this right, but in most circumstances, a bank or credit union isn’t required to notify you before making this monetary transfer.
If there isn’t any money to use to settle the debt, a bank will typically close an overdrawn account after 60 days.
Most credit unions will take this step after 45 days. Once this activity occurs, the financial institution charges off the account.
That means your debt will go to a collection agency to manage. These businesses can notify all of the credit reporting bureaus of the account status, creating a significant dip and your credit score.
This information can stay on your credit report for up to seven years. That’s why taking care of this obligation as quickly as possible is important for your financial profile.
What Is an Account Freeze?
An account freeze occurs when a financial institution doesn’t allow you to conduct any other transactions because of a negative balance. This step typically happens before the bank or credit union closes the account for good.
If you have a regular direct deposit from your employer, the money still goes into a frozen account. Any funds that are present go to pay off the negative balance.
Once there is enough cash to turn the negative balance into a positive one, the bank or credit union typically takes the freeze off of the account.
When an account is frozen, it should not continue to collect new fees or obligations. The terms and conditions will tell you what to expect with the existing balance until you can turn the negative number around.
Some people want to close an account to stop their spending habits. A bank will not allow you to take this action if you owe them money. Ignoring the obligation can cause the fees to continuously compound, making it so that you owe even more when it’s not even being used.
What Happens with Debt Collection?
Should your bank account go to debt collection, that means a different agency will start working on getting the money that you owe back to the financial institution.
Once the information goes to a debt collection agency, you can settle the account and have it permanently closed.
If you settle with a collection agency over your debt, that information will still be part of your credit record. It can create a significantly negative impact on your overall credit score.
After paying the debt, some banks will allow you to reopen an account to continue with your spending and saving. You might be required to take your business elsewhere because of the account closure and negative balance.
Either way, you can continue to work with a bank or a credit union for your regular spending needs because you’ve paid off the obligation.
What Can I Do to Stop Overdraft Fees?
If you are concerned about the number of fees that could be charged to your account, the best step you could take today is to opt out of overdraft coverage.
By taking this step, your purchases will not go through if there is not enough money in your account to pay for them. The machine will decline the card.
Some people decide to keep overdraft protection available because the value of not being embarrassed when making a purchase is greater than the cost of paying NSF fees.
If your finances have hit a rough patch, it makes more sense to prevent the extra expenses so that you don’t find yourself dealing with big extra and unexpected fees.
Another option is to link your savings account to your checking account. Some banks and credit unions allow you to have money from your savings automatically transferred to checking to cover an overdraft transaction. These fees are typically much less than NSFs, ensuring that your money can work for you better.
If that isn’t possible, consider asking your bank for a credit line that can be associated with your debit card. An overdraft with this structure would still create debt, but it would be without the added fees.
The easiest way to prevent overdraft fees or a negative account balance is to track your expenses and manage your spending. Most banks have tools that you can access from your online dashboard to help with these tasks.
Should I Take Care of My Negative Account Balance?
A negative account balance can have a long-term derogatory effect on an individual’s financial profile. This information tells other banks and credit unions that this person is a risky customer because of the unaddressed debt. The best way to resolve the problem is to eliminate the debt as quickly as possible.
Back in 2007, I was getting ready to move from Colorado to Washington. Some friends were helping with the drive, so I gave them temporary account access to my account to pay for expenses.
Except I gave them access to the incorrect account. It didn’t take long for the NSF charges to start adding up at $37 a clip. I’d watch with horror as a $4 coffee became $41. The worst one was a $0.97 transaction for a pack of gum.
I didn’t have many options. My taxes had just been filed, so I talked to the IRS about getting my refund advanced to prevent potentially hundreds of dollars in fees. They agreed to have it processed in three business days.
Since that wasn’t fast enough, I secured a payday loan to cover the negative balance with some extra charges that might come through during the move.
I figured that the tax refund could then pay for the payday loan without dealing with an excessive level of interest and fees.
My plan worked. There was enough cash to get the balance positive, and then the tax refund got delivered automatically as promised. Once the move was finished, I contacted the payday loan company to have that balance paid.
When you use your money management tools wisely, you can avoid most overbalance problems. The best step to take is to decide not to ignore a negative amount in your bank account. Those obligations will never disappear entirely.
