What Is an Overdrawn Bank Account and How To Fix It
Banks took in around $8.82 billion in overdraft fees last year despite many waiving overdrafts during the pandemic. If overdraft figures return to pre-pandemic levels, that number will increase by about $2 billion this year.
Thankfully, most checking account holders don’t ever have to pay these fees. According to Consumer Financial Protection Bureau studies, almost 80% of overdraft fees come from only 8% to 9% of all account holders.
While some banks are looking to eliminate overdraft fees — and some have already — many banks have made no such announcement. For those who are part of the 8% to 9% contributing to the bulk of banks’ overdraft revenue, understanding what overdrawn means and how overdrafts occur can help. Here’s a look at these terms and some steps to fixing and avoiding an overdrawn account.
What Does Overdrawn Mean?
“Overdrawn” simply means that more money was removed from an account than was available. It also means a negative bank account balance. The term can be confusing since the word “over” implies “above,” which seems like it would be positive. But when trying to remember “is overdrawn negative or positive,” it’s the opposite of how it sounds — overdrawn means a balance that’s below zero.
What Does Overdraft Mean?
An overdraft occurs when there isn’t enough money in an account to cover a payment or withdrawal, and the bank covers the difference. As a result, the account becomes overdrawn and has a negative balance.
What happens if an account is overdrawn? It depends on what type of overdraft protection an account holder has, but the account holder is often charged an overdraft fee. According to a Forbes 2021 survey, the average overdraft fee in 2021 was $24.93.
Good To Know
A non-sufficient fund fee is similar to an overdraft fee. But an NSF fee typically results from a declined request for payment from the account because there is not enough money to cover it. The bank covers the payment with an overdraft, which overdraws the account. In both cases, a fee may be charged. But with an NSF, the payment is declined, while with an overdraft, the payment is covered.
What Are the Steps Involved in Fixing an Overdrawn Bank Account?
If an account ends up overdrawn, there are a few simple steps to correct it.
Here’s How It’s Done
- Stop using the account immediately. Be sure to cancel any automatic or scheduled payments until the balance is positive again.
- Ask the bank if it will reverse any overdraft fees. A bank might refund a fee if it’s the first time the account has been overdrawn. Repeat offenders will likely not get fees reversed.
- Transfer funds into the account. Depositing cash or transferring money from another account is ideal. Still, even a cash advance on a credit card might be cheaper than racking up additional overdraft fees if no other funds are available.
What Are Common Causes of an Overdrawn Bank Account?
Anyone who’s ever realized “my bank account is overdrawn and I have no money” needs to take a moment to figure out how the overdraft occurred. Understanding what happened will make it easier to avoid making that mistake again.
Here are two common causes of an overdrawn bank account.
Failing To Keep an Accurate Account Balance
The biggest mistake that leads to an overdrawn account is not keeping an accurate record of outstanding payments and withdrawals.
Not all transactions immediately post to an account when an owner swipes a debit card or writes a check. A bank balance will not reflect these transactions until they post to the account. Withdrawing money from an ATM based on the current account balance or using the debit card for purchases may cause one or more payments that have not yet cleared to overdraw the account.
Using an old-school check register is the easiest way to keep track of an account balance. Record every deposit, payment and withdrawal and check the balance before every withdrawal, purchase or payment. This should prevent any additional overdrafts.
Forgetting About Automatic Payments
Setting up automatic bill payments can be convenient and help avoid the late payment of bills. But that convenience can be costly if those automatic payments are forgotten and money is withdrawn for another use before payments are made.
If automatic payments lead to overdraft fees too often, it might make sense to risk a late payment rather than an overdraft fee. However, setting reminders for when bills are due or when automatic payments are coming out can help ensure bills are not late and an overdrawn account is avoided.
Overdrafts are expensive, but they are avoidable. An overdrawn account should be fixed immediately, and once the cause is determined, it’s easier to avoid having that mistake happen again. Accurately tracking and monitoring the account balance can prevent most overdrafts and fees.
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- Consumer Financial Protection Bureau. 2021. "CFPB Research Shows Banks’ Deep Dependence on Overdraft Fees."
- Forbes. 2021. "Is 2021 The Beginning Of The End For Overdraft Fees?"
- Forbes. 2021. "Overdraft Fees Vs. NSF Fees: What’s The Difference?"
- Synovus Bank. "Fast Facts: What's the Real Balance in My Bank Account?"
- USA Today. 2021. "Overdraft fees are a cash cow for big banks. But public pressure is making them reconsider."