April 9, 2023

Negative Bank Balance: Consequences & How To Avoid It

Whether it's due to unexpected expenses, job loss, or poor financial management, having a negative balance in your bank account can feel like a financial nightmare.

However, it's important to remember that you're not alone, and there are steps you can take to understand and manage a negative bank balance. In this article, we'll explore the common reasons for negative balances, the consequences, and some practical tips for getting your finances back on track.

What Is A Negative Bank Balance?

Having a negative bank balance means you've withdrawn more money from your checking account than you have deposited—causing the balance to drop below zero.

For example, let's say you have $100 in your checking account, but failing to keep track of your spending, you make a purchase amounting to $120. Because you don't have enough money in your account to cover the full amount, your balance will drop to -$20, and that is what we call a negative balance.

If you don't deposit more money into your account to bring the balance back to positive, the bank may charge you overdraft fees, interest charges, and other penalties until it's paid off.

Furthermore, you may face potential account closure and trigger debt collection activities, which can all hurt your credit score.

By staying on top of your finances and spending within your means, you can maintain a positive balance and avoid these consequences.

What Causes a Negative Bank Balance?

Your first step to managing a negative account balance is understanding what caused it in the first place. This way, you can avoid making similar mistakes in the future. Here are several reasons why a negative bank balance can occur:

Bank Fees

Banks may charge fees for various services, such as account maintenance or ATM usage. If you don't have sufficient funds to cover these fees, it can lead to a negative balance.

Insufficient Funds

When you attempt to make a purchase or withdraw money from an ATM, the bank will check if you have enough money in your account to cover it.

If you don't have sufficient funds—and haven’t opted in for overdraft protection—the transaction will be declined. The bank may then charge you an insufficient funds fee.

Automatic Payments

If you have automatic payments set up for bills or subscriptions, and you don't have enough money in your account to cover them, you may be charged an insufficient funds fee.

Delayed Deposits

When you deposit funds into your account, it can take some time for the funds to clear and become available for use. If you spend the money before the deposit clears, you can end up with a negative balance in your account.

Fraudulent Activity

If someone steals your debit card information and makes unauthorized purchases, it can lead to a negative bank account balance. Ensure you monitor account activity regularly and report any suspicious transactions to the bank immediately.

What to do if your bank account is negative

It's important to understand that a negative balance isn't the end of the world—but it does require you to take action. Here's what you can do if your bank account goes below $0:

Immediately Stop Using the Account

The first step to managing negative bank account balances is to stop using the account until you have brought it back to positive.

This means avoiding any new transactions or purchases until you have enough funds in your account to cover them. Using the account while negative can lead to more fees and penalties, making it even harder to get it back into the black.

Analyze Your Account Activity

To identify the cause of the negative balance, review your recent account activity by checking your statements or online banking transactions.

Identify any outstanding payments or deposits that haven't been cleared, and calculate your current balance. This will help you understand your financial standing and how long it may take to bring your account back to a positive balance.

Deposit Funds

The easiest way to bring your account back to positive is by depositing funds. You can either transfer money from another account or try and get some extra cash through side hustles or even by borrowing, if the former is not an option.

Negotiate With Your Bank

If you are facing financial hardship, such as a job loss or unexpected expenses, you can contact your bank to explain your situation and request assistance.

Depending on the bank's policies, they may be able to waive fees or provide a payment due date extension. Some banks also offer short-term loans to cover overdrafts, but keep in mind that they typically come with interest, fees and are subject to approval.

How To Avoid a Negative Bank Balance

Knowing how to get your bank account out of the negative is important, but how can you stop it from happening again in the future?

The best way to prevent a negative bank balance is by making sure there's always enough money in your account to cover all your monthly expenses.

Here are some steps you can take to make that possible.

Set up a Budget

One of the most effective ways to prevent a negative bank account balance is by creating a budget.

A budget is a plan for how you will spend your money. Start by listing all your income sources and expenses to ensure you're not overspending and you have enough money left over for savings.

Use a budgeting app or spreadsheet to track your spending and ensure you are staying within your budget.

Prioritize Your Spending

Once you have established your budget, it's important to prioritize your spending.

Identify your essential expenses, such as housing, food, and transportation, and allocate enough money to cover those costs first. Then, allocate funds towards other crucial expenses, such as debt repayment or savings.

Finally, allocate a portion of your income towards discretionary expenses, such as eating out or entertainment. This way, you'll ensure you're spending money wisely, avoiding unnecessary fees and ultimately, negative bank account balances.

Cut Your Expenses

To prevent your account from going negative again, try reducing your expenses and checking your financial habits.

This may mean canceling subscriptions or memberships you no longer use, cooking at home instead of eating out, or buying generic brands instead of name brands. Look for areas where you can cut back and make adjustments accordingly.

Increase Your Income

A crucial way to avoid negative bank balances in the future is to increase your income. Look for ways to earn extra money, such as taking on a side hustle or freelance work, asking for a raise at your job, or selling unused items.

Increasing your income can help you cover your expenses and build your savings, reducing the risk of negative bank balances.

Build an Emergency Fund

An emergency fund is money set aside to cover unexpected expenses, such as medical bills, car repairs, or job loss. Building an emergency fund can help you avoid relying on credit cards or overdraft protection to cover these expenses.

Aim to save enough to cover three to six months' worth of living expenses. Start small by setting aside a portion of your monthly income and gradually increasing your savings.

Link Accounts

You can link your checking account with your savings account or a line of credit—so that if your account is overdrawn, the bank can automatically transfer funds from them to cover the negative balance. This may help you avoid overdraft fees and other penalties.

Avoid Overdraft Fees

Overdraft protection can be costly, so it's best to avoid using it if possible. Instead, consider setting up alerts on your account to notify you when your balance is low. This may help you avoid overdrawing your account and incurring fees.

Monitor Your Account

To avoid any unexpected charges or fraudulent activity, ensure you monitor your account regularly.

Set up alerts for any large transactions, and review your statements carefully to ensure all charges are accurate. If you notice any discrepancies or unauthorized charges, report them to your bank right away for assistance.

Seek Professional Help

If you're finding it difficult to manage your finances, consider seeking help from a financial advisor or credit counselor.

They can provide money management tips, help you create a budget, and prioritize your expenses. Some may even offer debt management plans or other strategies to help you get back on track.

Take Charge of Your Finances Today with EarnIn

A negative bank balance can be frustrating, but the good news is that you don't have to face it alone.

With the right tools at your disposal, you can manage your finances more effectively and avoid the consequences of a negative balance.

EarnIn's innovative financial solutions are designed to provide you with the flexibility and security you need to stay on top of your finances.

Through EarnIn's Earned Wage Access tool, you can transfer up to $100 of your earned wages per day and up to $750 per paycheck before payday. This means you can have cash on hand to cover any unexpected expenses.

What's more, with EarnIn's Balance Shield feature, you can finally say goodbye to the anxiety of constantly checking your bank account balance. It lets you set a minimum balance threshold and sends alerts when your balance falls below it, helping you monitor your account balance.

Download the EarnIn app today and get ready to take better control of your finances.

Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances.