Effects of Overdrawing Your Checking Account
With checking account, customers can easily access their funds in their bank account with the use of personal checks, debit cards or online platform. This means that you don’t need to carry cash around in order to carry out transactions. If you operate a checking account, your money in the account is insured up to limits set by the Federal Deposit Insurance Corporation. Each depositor is insured to at least $250,000 per insured bank.
As convenient as the checking account is to operate, if you don’t monitor your transactions closely, you may not know when you have spent beyond what you have in your account. The use of a debit card to buy goods and services and withdraw cash from an ATM coupled with easy access to online banking services, like paying bills and moving money around, at the tap of a keystroke, you can easily overdraw your account.
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What is bank overdraft? Bank overdraft occurs when you withdraw more funds than you have in your checking account thereby making the account balance to drop below zero. Some banks allow you to overdraw your checking account. If your bank does not allow you to overdraw your account, the bank will not honour any payment that may make your account balance to fall below zero or the minimum balance. They will not honour your check as a result of not sufficient fund (NSF). On the other hand, some banks offer various forms of overdraft protection plans for checking accounts. This protection plan allows you to link your savings account to your checking account. The bank can quickly move money from your savings account into your checking account if a transaction will cause your account to be overdrawn. For this plan to be effective, you must ensure you have sufficient funds in your savings account.
Overdrawing your checking account is not actually a good banking practice. It has some financial implications and these shall be discussed below:
- Payment of avoidable fee: Whether you have overdraft protection plan or not, the bank will charge you a fee each time you overdraw your account. And if you don’t settle the account immediately, you will still pay interest expenses on the overdrawn amount. If your check is returned due to insufficient fund, your bank will still charge you a fee for this.
- Difficulty in getting credit: If you continue to overdraw your current account, you may likely find it difficult to find lenders who will be willing to give out loans to you. It is not necessary that the lender should be your current bank where the account was opened. Other financial institutions will likely review your bank statement before they approve your credit application.
- Impact on Credit Score: It is true that banks don’t report your checking account transactions to the credit bureaus. But if the fee and the overdrawn amount are not paid on time, it can be referred to collection agency. The collection agency will report this to the credit bureaus. On the other hand, if the bank did not send the debt to collection agency, may be, because of the amount involved, it can decide to write off the amount. The bank will report this to the credit bureaus and it will appear as a charge off in your credit report. This will hurt your credit score.
- Legal Implication: You may not be able to give out checks. If you had given out checks before you mistakenly overdrew your account, the check will definitely bounce. And this can result into the payee taking legal action against you.
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If you want to avoid the consequences of overdrawing your account, you need to put a system in place that can help you track your transactions and other charges. This will help you have a fair knowledge of your bank balance per time.