Overdraft

Overdraft summary:

Overdraft coverage lets you overdraw from your bank account.
You can opt out of overdraft coverage.
Direct coverage, linked account transfers, and lines of credit are types of coverage.

Overdraft Definition and Meaning

An overdraft is when the bank or credit union lets you withdraw more money than you’ve got in your account, typically charging you for the privilege. Banks can charge you overdraft fees when you overdraw your checking account with a debit card, ATM, check, or ACH transaction.

A short-term loan is a good way to think about it. Your bank spots you money by allowing your balance to go negative, and it charges you for the convenience.

Key Features of Overdrafts

Fees and optionality are key features of overdrafts. Banks typically charge you for overdrawing from checking accounts. You can opt in or out of overdraft protection.

Fees:

Banks charge fees for letting you overdraw from your accounts
A typical overdraft fee is about $35
Some banks don’t charge overdraft fees
Some banks deny attempts to overdraw

Optionality:

Banks let you opt in or out of overdraft plans
Opt-in by default: Banks may automatically enroll you into overdraft coverage for checks, ACH withdrawals, and automated electronic transactions (like monthly bill pay)
Opt-out by default: Banks need your explicit permission to enroll you into overdraft coverage for one-time debit card payments and ATM withdrawals

When you opt out of overdraft protection, your bank will typically decline transaction attempts that would put your balance into the negative. Some banks charge you insufficient fund fees (NSF) for attempting to overdraw an account without overdraft protection.

Check your bank’s fees and opt-in/opt-out policies to get the right amount of overdraft protection.

Types of Overdraft Protection

Direct coverage, linked account transfers, and lines of credit are a few common types of overdraft protection. Each has pros and cons; see these below.

Type	What It Looks Like	Typical Costs
Direct coverage	Bank covers overdraft, charges you flat fee per transaction	$15 to $40 per transaction
Linked account Transfer	Transfers from linked accounts (savings, etc.)	Transfer fee ($0 to $10)
Line of credit	Bank offers credit, you repay with interest	Interest on borrowed amount

Direct coverage is when a bank charges you for each time you overdraft. The pro is it prevents transactions from being declined at the cashier's counter. The con is it’s expensive. High fees can add up quickly and leave you in debt, especially if you overdraft often.

Linked account transfers are when banks transfer money from a linked savings account to cover a negative balance. The pro is it’s cheaper than direct coverage. The con is you need a linked account with enough money to cover your overdrafted checking account.

Line of credit is when a bank lets you borrow up to a certain amount, giving you the freedom to go negative without charging per-overdraft fees. The pro is it’s flexible, and you can cover big purchases. The con is your bank will charge you interest, and it may require a credit check.

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Overdraft FAQs

Can you go to jail if your bank account is negative?

No, you won’t go to jail for simply having a negative bank account balance. Overdrafting your account is a common issue many people face. In fact, in 2023, over a quarter of U.S. consumers said that someone in their household got hit with an overdraft or non-sufficient funds (NSF) fee in the past year, says a Consumer Financial Protection Bureau (CFPB) survey.

When your bank transactions exceed the available funds, besides overdraft fees or NSFs fees, it could also lead to the balance you owe sent to collections or the bank closing your account.

Unless the negative balance is due to fraudulent activities, you won't be handcuffed and confined to a jail cell. Fraudulent activity includes intentionally writing bad checks, forgery, or making deceitful withdrawals such as "check kiting," which is when you write a check for an amount greater than what's in the account. However, in such cases, legal consequences, including fines, hefty penalties, and imprisonment, could be possible.

But for most people, having a negative balance due to overspending or mismanagement does not result in criminal prosecution.That said, you'll want to do all you can to keep your bank in the flush. Otherwise, you could get hit with a slew of fees.

Can you transfer the negative balance from your credit card to a bank account?

If you find that you have a negative balance on your credit card, you can contact your credit card or bank and request that the balance amount be deposited into your bank account. Or, you can request cash, a check, or a money order in the amount of the negative balance. Phone your credit card company and request that your negative balance be converted.

What happens when your bank closes your account with a negative balance?

According to the Consumer Finance Protection Bureau, if your bank or financial institution closed your account because of a negative account balance, they will usually report this closed account to a checking account reporting company such as Chex Systems or Early Warning Services. This can make it more difficult for you to open a bank account in the future.