Overdrawing Your Checking Account

Overdrawing is a feature offered by many financial institutions in which your checking account balance is allowed to go below zero. For example, you have a $40 balance in your account and use your debit card to buy a $70 pair of shoes. The transaction is processed, and your account balance is now -$30. (Actually, it may be further in the red if you are charged an overdraft fee – discussed more below.) In the past, many accounts would automatically allow you to overdraw, but now consumers have to opt in to have it as a feature of their account. So, should you opt in? There is no one right answer. To decide what is best for you, it is helpful to consider how often you write checks, your personal preference as to whether you would rather a debit card transaction be approved or declined if there is not enough money in your account, and if overdraft protection is available.

If you write a check for more than the amount in your account when the check is processed and your account does not allow overdrawing, the check will “bounce”, meaning the funds will not be deposited in the account of the person you wrote the check to. Not only can your financial institution charge you a nonsufficient-funds fee, but the check receiver may be charged a fee as well – a fee he or she will probably want you to pay. On top of that, if the check was for a bill, such as rent, you may be charged a late fee. If your account allows overdrawing and writing a check put you in the red, you can be charged an overdraft fee, but it is often much less than all of the fees you have to pay if your check bounces (plus, the check receiver gets paid). Thus, the more frequently you write checks, the more it may make sense to permit overdrawing.

If you try to use your debit card when there is not enough money in your account to cover the transaction and your account does not allow overdrawing, the transaction will be declined. No fee is charged. If your account allows overdrawing, you can be charged a fee, like with a check. (If you make multiple transactions while in the red, you may be charged a fee for each one.) Because having your debit card declined does not cost anything, many people who primarily use their debit card to make transactions and rarely write checks would rather deal with the inconvenience of not having a transaction go through and save money instead of being able to overdraw. However, there are some people who prefer to pay the fee and have the transaction go through, especially if not being able to do so means they cannot buy groceries or other necessities. It is simply a matter of personal preference.

Overdraft protection is a service that some financial institutions offer to account holders who choose to allow overdrawing. There are different types of overdraft protection available. Your account may be linked to your savings account, credit card, or line of credit, with the amount you overdraw being deducted from or charged to that. Another option is to set up “courtesy pay” so your financial institution will pay an overdrawn amount for you with the understanding that you will pay them back within 30 days. (If you do not have overdraft protection, the full amount you are overdrawn is typically transferred out of your checking account the next time a deposit is made.) There may be a monthly or yearly charge for these service, as well as a per-transaction fee (assessed each time you overdraw), but it is typically less than the fees associated with overdrawing without overdraft protection. Some people may think that the traditional fees associated with overdrawing are too expensive for the convenience provided but feel it is worth it if they are able to have lower fees with overdraft protection.

Having the ability to overdraw, even if you have overdraft protection, does not relieve you of your responsibility to make sure you have enough money in your account to cover your transactions. Overdrawing should only be used as a fallback in rare situations, not as a regular method to pay your bills. (If you find yourself relying on overdrawing to make ends meet, it is a good idea to evaluate your budget and see if there are ways you can increase your income and/or reduce your expenses.) Remember, when you overdraw your account, you are not given free money – you must pay back the amount you overdraw. People often get stuck in a vicious cycle where, because they have to pay back their overdrafts from previous months, they continue to overdraw.

One of the best ways to prevent overdrawing or bouncing checks is to monitor your account balance. Is it necessary to check your balance every time you want to buy a $1 pack of gum or $3 magazine? No, but it is a good idea to do so whenever you are not sure if there is enough money in your account. In this day and age, knowing your balance is a snap – most financial institutions will let you check it over the phone or on-line. (Remember to subtract from your balance the amount of any automatic debits that will occur before your next deposit and outstanding checks.) It can also be helpful to have a cushion of a few hundred dollars in your checking account – if you typically only have $3 or $4 left in your account before the next payday, you are more likely to overdraw than if you have $300 or $400.

While it is best to manage your finances so that you never need to make a transaction when there is not enough money in your checking account, having the ability to overdraw, especially when used in conjunction with overdraft protection, can be a helpful tool for many people.
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