It happens. An unexpected expense or just being too busy to check your spending before payday and — boom —you have a negative bank account balance. Overdrawing your account can be unavoidable, but here are some tips about what being in the red can cost you long-term.
Snowball: The Real Cost of Overdrawing Your Account
While a bank account overdraft can happen to anyone, if not handled correctly it can quickly snowball, with severe consequences for your financial health for years to come.
The immediate effect of dinging your bank account is usually a fee as the bank bails you out. It’s annoying but not as bad as being stuck at the checkout without cash, right? Fees can build up, however, and if overdraft protection becomes a regular part of making it through the month, you could be in real trouble.
Failure to keep up with overdraft fees can see your account being sent to collections, which will quickly affect your credit score. This will make it harder to borrow money to finance the things you need to get ahead in life, such as education, a car, or even a house. Meanwhile, a particularly poor record can even make it harder to open a regular bank account.
If you are unable to pay off overdraft fees or keep your accounts in the black, the consequences can become far more serious.
Unpaid account balances will not only be charged interest, at some point the bank will pass these on to a collections agency. You will then likely owe money to a third party, and the debt will appear on your credit report. Failure to pay a debt, or delinquency, is a serious blot on your credit record and will stay there for at least seven years.
Paying the Price
Negative information on your credit report will lower your credit score. This will seriously affect your ability to get credit or borrow money in the future, including:
- Applying for credit cards
- Applying for personal or auto loans
- Getting a mortgage
- Refinancing existing debts
Not only will it be harder to qualify for credit or loans, but you will have to pay higher interest rates on the money you can borrow. This can be up to hundreds or thousands of dollars over the life of, say, a house or car loan.
It is relatively easy to prevent negative consequences by doing everything you can to avoid overdrafts and by paying your overdraft fees promptly if you are charged. There are also clear steps you can take to prevent bank overdrafts from damaging your long-term financial wellness.
Getting by can be tough, especially when you are starting out. An overdrawn account is an unwelcome reality check and an overdraft fee puts you on the back foot for the next month, too. Here’s how to avoid the worst consequences of being caught short at the end of the month.
The good news is that overdrawn checking account balances are not included in your credit report — provided you pay the protection fee. If your overdraft was a one-off, the effect on your overall financial wellness should be minor. But the more it happens, the harder it gets to control the consequences.
Link a Savings Account
A simple solution is to link a savings account to your checking account so funds are transferred if your balance falls too low. This is a wise choice if you have bills or credit card payments linked to your checking account.
Many credit unions and banks offer this service for a small daily fee. Provided you have the required minimum balance in your savings account. It’s a handy way to avoid having charges built up on our checking account.
Check Your ChexSystems Report
While the credit bureaus do not normally keep track of your checking account, banks certainly do. A reporting organization called ChexSystems tracks your deposit accounts across all banks and credit unions and records things like:
- Bounced checks
- Unpaid balances
- Forced closures
- Suspected fraudulent activity
A pattern of repeated overdrafts or other negative behavior could make it harder to open deposit accounts in the future. You will also pay higher fees on accounts you can open.
If you are having trouble opening bank accounts because of past overdrafts, you can clean up your ChexSystems account. Request a copy of your report, check it is accurate and contact lenders to correct any errors or fraud. Pay off any outstanding debts as soon as possible.
Build a Budget
The safest way to avoid overdraft fees and other negative consequences is to create a realistic budget for your spending — and stick to it. Talk to a trusted friend or adviser. Many banks and credit unions also offer financial planning or coaching resources for customers and members.
Financial wellness takes a wider view of your financial situation, looking at your commitments, ambitions, and your overall attitude towards spending, saving, and investing. Taking the time to learn about money can help you and your family live a better life now and in the future.
Empowering Communities with Financial Know-How
We are committed to helping you take control of your financial future. Our overdraft protection services include:
- Savings account coverage for up to six transactions a month
- Overdraft lines of credit, and
- Extended overdraft protection.