All of us periodically overdraft our bank accounts. Sometimes we are unaware that we did it or did it on purpose because we had to pay some expenses. It is not smart to overdraft your bank account because it can lead to increased debt. You certainly need a plan for how to repay it on time. Apart from increased debt, it can lead to declining credit scores and accumulating fees.
Reasons for Overdrafting Your Bank Account
There are a few reasons that can lead to a zero balance or even a negative balance in your bank account. Here are some common causes:
- Pending Transactions – If you make a purchase with your debit card, there is a period between when you pay and when the actual purchase is shown on your balance. The transaction is considered pending during this period. If you check your bank account at that point, your balance may be inaccurate, causing you to think that you have more money and leading to overspending.
- Pending Direct Deposit – If you put some money directly into your bank account, same as with pending transactions, it will not show on your balance that very instant. Depending on the source, it can take a few hours to a few days for your money to be deposited in your bank account and shown in your balance. It is wise to check your credit if you have a scheduled payment or want to make a purchase.
- Impulse Spending – From time to time, we all make impulse purchases that can lead to spending more money than we actually have. If you do it regularly, it can lead to overdrafts in your bank account. If you are addicted to impulse shopping, learn how to budget your income and avoid it.
- Fraud – With the invention of the internet and doing everything online, identity theft is rising. The thief will steal your bank information and steal your money, often making extraneous and expensive purchases with your card. If this happens, contact your bank immediately and freeze your account. The bank will give you a new card and replenish the money that has been stolen.
- Bank Error – Believe it or not, even in the digital era, this still happens. Your bank account can be overdraft because of the bank error. Contact the bank immediately, and the representative should correct this error in no time.
Overdraft Bank Account – What Can Happen if You Don’t Pay It Back?
If your bank account falls in a negative balance, you have an overdraft and have to pay it back. If you do not repay on time, it can lead to overdraft fees and other issues, such as:
Accumulated Overdraft Fees
The bank will usually charge overdraft fees from your checking account. Banks charge a financial penalty to their customers who overspend on their accounts. It can cause serious damage to your financial situation.
Depending on the bank you are a customer of, some banks charge overdraft fees per transaction made or per day your account is in a negative balance. Therefore, your overdraft fees will keep growing. So, to avoid falling into deeper debt, it is wise to pay it back as soon as possible.
You Can’t Use Your Debit Card
If you have an overdraft, you won’t be able to make any purchases with your debit card. As the debit card is connected to your bank account, the purchases will be declined if you have an overdraft.
The Payments Will Be Declined
If you have automatic payments and your balance is zero or below, the payments will be declined because of insufficient funds in your account.
So if you pay your bills through automatic withdrawals from your account, multiple declines can occur if you are overdrawn. This can lead to the following:
- Late or Missed Payments – If your balance stays negative for a long period of time, these missed payments can affect your credit score.
- Loan Default – Because of the overdraft, you can miss your loan payments, and if you miss them several times, it can cause a loan default. When this occurs, the lender may send the debt to a third party or a debt collection agency.
- Wage Garnishment – Some lenders will try to get their money by garnishing your wages.
- Credit Report – Although not directly, an overdraft of your bank account may lead to a situation when it will affect your credit report. For example, if you are in loan default or have late payments.
How to Avoid an Overdraft on Your Bank Account?
As mentioned, it is best to avoid an overdraft on your bank account. Here is what you can do:
- Check Your Balance Regularly – You can check your account balance by using the bank app on your smartphone.
- Get Overdraft Protection By Providing an Overdraft Credit Limit – This is financial protection provided by your bank up to the credit amount in case you overspend.
- Set Up Low Balance Alerts – You can set a low balance alert either by text, phone call, or email if your account reaches a certain limit.
- Get a Backup Savings Account – Link your bank account to your savings or checking account. That way, if you are in overdraft, the money can be transferred from these accounts. It is not free of charge, but it will cost you less than paying overdraft fees.
By following these tips, you will be able to avoid overdrafts and also avoid paying overdraft fees.
Bank account overdrafts can happen to anyone. Often, we do it without knowing. That is why we have to check our accounts regularly and have a plan in place to put money in the account immediately so as not to accumulate overdraft fees. Even taking a loan will be a good solution.