Understanding overdrafts

Overdrafts occur when you spend more money than you have in your checking account creating a negative balance in your account. It can happen to anyone – for example, if you forget about a payment you have scheduled, a deposit is returned unpaid, or the timing of your payday does not match your payment due dates.

There are precautions you can take to prevent overdrafts. The easiest approach? Keep a budget, track your spending, and don’t spend more than you have available.

Here are some tips to help avoid overdrafts:

  1. Know your bill due dates. If possible, try to time bill payments to be after paydays, or when you’ll expect to see money in your account. You may also be able to adjust your bill due dates. Many lenders will let you change what day of the month your payment is due. For example, if you know you get paid consistently on the 15th of the month but your car payment is due on the 14th, give your lender a call and ask for the due date to be pushed to the 16th of each month.
  2. Know when you’re getting paid. If you get paid every Friday, it’s pretty easy to track. But if you have an inconsistent paycheck, or your paycheck will be delayed due to a holiday, you may need to adjust your spending.
  3. Get in the habit of checking your account balance and transactions regularly. Consider using online banking and mobile banking apps to keep track of your account. Personal financial management applications, which combine your account history and transactions, may identify useful insights to help you manage your spending.
  4. Set up notifications. As a backup to regularly checking your account, sign up to receive timely alerts—either emails or text messages —when your account balance dips below an amount you specify.
  5. If you can, leave a small cash cushion in your account. This way, even if you set up automatic bill payments before your next paycheck, you are less likely to run the risk of an overdraft.