What Does It Mean When You Are Overdrawn?
Checking accounts fundamentally work by issuing an IOU to a business or individual for a product or service and when that IOU was presented to the bank funds are disbursed for the amount specified. So it makes sense that for all checks written there are sufficient funds available in the checking account to make payment when those checks are cashed. But despite people best intentions, sometimes accidents happen at which point there are not enough funds available to cover outstanding checks. For example, when that happens and a check is presented for $800 and there is only $500 available to cash it the checking account becomes overdrawn.
Becoming overdrawn on a checking account can happen for a number of reasons. One common reason is that sometimes payments are required for credit cards or utilities on specific dates and checks will be written in advance expecting a paycheck or some other form of income to be deposited in the interim. This of course is a bad practice because a check is being written with the foreknowledge that there are currently not enough funds available but sometimes these situations are unavoidable. Another circumstance which can lead to an overdrawn account is the simple act of failing to note that a check was written in the checkbooks registry. If numerous checks are written through the course of a hectic day then not all checks may be thoroughly documented in the check registry which is an accounting of all funds currently available. When this happens it is possible that the individual thinks they have more funds available than they actually do. When subsequent checks are written it is based against an inaccurate checking balance which leads to the account being overdrawn when the most recent checks are presented to the bank.
Many financial institutions understand that every now and then a checking account will become overdrawn and there are various precautions that can be taken to prevent this from leading to overdraft fees. Some institutions will automatically use funds from a savings account which is tied to the checking account to cover an overdrawn check and prevent an overdraft fee from occurring. This however is at the discretion of the institution and some will not use savings account funds but still allow the check to clear. If this happens, it will often result in an overdraft fee which is specified on the account statement provided by your bank or credit union. The terms vary but it can be as high as $32 per check resulting in insufficient funds as well as an additional charge for each day the balance remains below zero. Since the overdraft fee is per check this can lead to hundreds of dollars in fees if numerous checks were written to multiple vendors or individuals.
At the end of the day it is the individuals personal responsibility to make sure they have enough funds available in a checking account to cover all checks written. While some institutions will be helpful by pulling funds from savings or offering overdraft protection for a small fee these options do not mitigate the need for a proper accounting of what funds are available. There are many responsible individuals who go on their entire adult lives without ever becoming overdrawn on a checking account. Between online banking availability and phone access a checking account holder is always able to verify how much money they have and can therefore write checks with confidence. By being a financially responsible individual you will prevent ever becoming overdrawn incurring overdraft fees and penalties as well as maintaining good relationships with other people and businesses.
