The Problems with Overdrawing Your Checking Account
You just overestimated the amount of money that you had left in your bank account. You didn’t realize that the balance was dwindling far too close to the bottom. With that false sense of confidence, you made a purchase that cost more than what you had in the account and put yourself into overdraft.
Going into overdraft one time is an understandable mistake. Doing it more than once is a pattern that you should try to break as soon as possible.
Overdrawing your checking account comes with a lot of consequences that you’re better off avoiding — the least of which is draining your account balance down to nothing. Find out why this habit is a huge problem, even when you’ve opted into an overdraft protection plan.
Owing the Bank
If you’re signed up for overdraft protection, your bank might allow your transactions to go through and your balance to dip into the negatives. This blessing comes at a price. The bank is essentially giving you a temporary loan to cover the remaining costs of your transaction. You will have to repay that loan and do it quickly.
In addition to your temporary loan, the bank might charge you an overdraft fee. It may continue to charge you this fee for every transaction you make while in overdraft — which could happen if you don’t realize that you’ve gone into overdraft and keep spending as usual. These charges can pile up and make it harder for you to get your account back into the positives in a short amount of time.
If you don’t repay the loan and the overdraft fees by your bank policy’s deadline, you may get hit with an extended overdraft fee. This is sometimes called a “sustained overdraft fee.” In general, you will be charged this fee when your checking account remains in the negatives after 5 to 7 days. So, you won’t have that long to regroup and get your finances back on track.
Dwindling Your Savings
Maybe your overdraft protection plan is a little different. Your bank doesn’t give you a temporary loan to cover the remainder of your transaction. Instead, your plan allows you to link your checking account to a secondary account. When you overdraw your checking account, the linked account automatically covers the costs so that the checking account’s balance doesn’t dip below zero.
One popular option is to link your checking account to a savings account. It’s a safe bet since you’re using your own personal funds to cover the problem. You’re not borrowing anything. It’s your money to use at your discretion. But of course, there is an issue with this.
With this setup, you’ll be dwindling your savings to compensate for your checking account mistakes. Depending on the purpose of your savings, this could be a very risky decision. For instance, if your savings account is storing an emergency fund, you don’t want to take away from it to cover non-emergencies.
Your habit of going into overdraft could siphon your emergency savings, which you’ll come to regret when an emergency expense crops up. You might have to look to an alternative payment option, like a personal line of credit, to cover the expense right away. If you don’t have a personal line of credit already, you can try to apply today online—as long as you meet all of the qualifications, of course. With an approved online line of credit, you can use request withdrawals within your credit limit to cover urgent expenses and have those funds deposited into your bank account. Then, you can focus on a repayment plan.
Ideally, you shouldn’t have to use a personal line of credit to cover an unexpected expense. That’s what your emergency savings are for.
Taking Cash Advances
Savings accounts aren’t the only types of accounts that you can link in an overdraft protection plan. You can link a credit card as a backup plan. This might be a very tempting option when you have more available credit than savings — or worse, when you have no savings whatsoever. But you should avoid it.
Why? Whenever your checking account goes into overdraft, your linked credit card will automatically cover the remainder. This transaction will be treated as a cash advance. Unlike your regular credit transactions, cash advances are charged interest immediately after going through. And if that wasn’t enough of a deterrent, overdraft can impact your credit score over time.
Bank Account Closure
If you have a habit of going into overdraft and staying there, your bank might close your account. If you owe the bank money from your overdraft protection’s temporary loan and additional fees, you will still need to pay it. The account closure doesn’t give you a clean slate. The bank will want you to repay everything you owe. If you avoid this repayment, they may send your debt to a third-party collection agency.
As you can see, overdraft (even with an overdraft protection plan) is not worth the risk. Stop making this financial mistake so that you can avoid the consequences that come with it!