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One downside of leaving a traditional 9-to-5 for a life of self-employment is navigating your personal finances as a sole proprietor. From invoicing to estimating taxes, it’s all on you — because you’re the boss now.

Qualifying for a personal loan while self-employed could also present some challenges. Self-employed individuals may have a need for a personal loan, but may find it difficult to produce traditional documentation, like W-2s or pay stubs, used to verify income. But, that doesn’t necessarily mean you’re out of luck. Here’s a look at some ways to get a personal loan when you’re self-employed.

How to Get a Personal Loan if You’re Self-Employed

A personal loan is a type of installment loan that can be used for nearly any personal expense, including home improvements, a work sabbatical, or consolidating your credit card debt. If you’re considering making a big purchase, like buying an engagement ring, a personal loan can be an alternative to using a credit card, if you don’t have the means to pay the balance off right away.

Personal loans are typically unsecured, meaning a lender won’t require collateral. However, they can also be secured, usually by the asset purchased with the loan. Unsecured loans are usually approved based on the financial standing of the borrower.

In addition to looking at an applicant’s credit history, lenders will also typically consider a potential borrower’s income when deciding whether to not o approve a loan and, if so, what the rates and terms will be. Those who are self-employed may find it more difficult to show proof of income, especially if their income fluctuates from month to month and year to year.

Self-Employed Loan Requirements

Loan requirements for self-employed individuals will be similar to the typical loan requirements for any borrower as determined by the lender. In addition to evaluating factors like the applicant’s credit score, many lenders will require proof of income.

Traditional documentation used to verify income includes pay stubs and W-2s. However, self-employed people may have some difficulty producing these documents, because they often aren’t W-2 employees. It is possible for self-employed individuals to show proof of income, but it may require a little more legwork.

In general, lenders are looking for borrowers who have income stability and it can help if the borrower has been working in a single industry for at least two years. A shorter employment history could indicate that you are a borrowing risk.

Recommended: Typical Personal Loan Requirements Needed for Approval

Showing Proof of Income When Self Employed

Those who are self-employed have a couple of options for showing a lender they have sufficient and reliable income. Here are a few options that self-employed individuals could provide as documentation to prove their income.

Tax statements: Self-employed individuals can use their tax returns from the prior two or three years to offer proof of income. These forms include your wages and taxes for those tax years. Lenders often view tax documents as a reliable source of income proof because they are legal documents.

Bank statements: Bank statements could be used if there is a regular history of deposits that illustrate consistent income.

Profit and loss statement: If you own your own business, this document provides an overview of your costs, expenses, and revenue.

Court-ordered agreements: These may include things like alimony or child support.

Keep in mind that each lender will likely have their own application requirements, so be sure to read those too. Contact the individual lender if you have specific questions on the types of documentation they’ll accept.

Consider Having a Cosigner

In the event that you are still struggling to gain approval for a personal loan with your self-employed proof of income, one option is to consider adding a cosigner. A cosigner is someone who agrees to pay back the loan should you, the primary borrower, have any trouble making payments.

A cosigner can be a close friend or family member, ideally one who has a strong credit history who will strengthen your loan application.

Why It’s Difficult for the Self-Employed to Get a Personal Loan

It can be more challenging for self-employed individuals to provide proof of income to lenders, which can make it more challenging for them to get approved for a personal loan. But it’s important to note that each loan application is unique, and employment status is just one consideration.

For example, a self-employed individual who has a stellar credit history and who has been self-employed for a few years may be in a better position to apply for a personal loan than someone who has just transitioned into managing their own business.

The Income Challenge

Proving consistent and stable income is the biggest challenge for self-employed individuals. Because you may not be guaranteed the same payment each pay period, lenders may request specific documentation in order to verify the fact that you have enough cash coming in to make payments on the loan. Some lenders may request tax returns for several years in order to verify your income.

Consistency Matters

Consistency in income is another major hurdle for the self-employed. It’s not uncommon for self-employed people to experience fluctuation in their income. While some slight fluctuation may be acceptable to a lender, for the most part they are looking for consistent payments getting deposited into your account, even better if there is an increasing trend over time.

Personal Loan Alternatives When Self-Employed

Personal loans aren’t the only option for self-employed individuals looking to borrow money to pay for expenses. Other options to consider include a credit card, cash advance, or a home equity loan.

Credit Cards With 0% APR Promotions

Credit cards can have high-interest rates, but with a 0% APR promotion, a credit card could be a great tool to pay for an upcoming expense. Just be sure to pay off the credit card before the promotional period ends and interest starts accruing.

Recommended: Average Credit Card Interest Rates

Cash Advances

A cash advance is a short-term loan generally offered by your credit card which allows you to borrow cash against your existing line of credit. Cash advances can provide an avenue for you to get quick access to cash, but there may be additional fees and a high-interest rate for borrowing. Be sure to read all the terms and conditions outlined by your credit card company before borrowing a cash advance.

Home Equity Loans or HELOCs

If you are a homeowner, you may be able to tap into the equity you’ve built in your home using a home equity loan or home equity line of credit (HELOC). A home equity loan is an installment loan where the borrower receives a lump sum payment and repays it in regular payments with interest.

A HELOC, on the other hand, is a revolving line of credit that the borrower can draw from and, once it is repaid, continue drawing from during a specified period of time.

Business Loans

Small business loans can be used to pay for business expenses. Self-employed individuals may be able to qualify for loans backed by the U.S. Small Business Administration (SBA), as well as private small business loans offered by banks, credit unions, and online lenders.

It is important to keep your personal and business expenses separate as a self-employed person. If you are using the money for a personal expense, you’ll want to avoid borrowing a business loan. Also keep in mind that many lenders don’t allow you to use personal loans for business expenses.

The Takeaway

The challenge for self-employed individuals applying for a personal loan will generally be providing proof of income. Alternatives to traditional proof of income documents include tax or bank statements.

Fortunately, many lenders understand that a full-time job isn’t the only qualifier of financial stability and will also consider factors like your credit score, education, financial history, career experience, monthly income versus expenses, and whether you have a cosigner.

Think twice before turning to high-interest credit cards. Consider a SoFi personal loan instead. SoFi offers competitive fixed rates and same-day funding. Checking your rate takes just a minute.

FAQ

Can you get any loans if you’re self-employed with no proof of income?

It is possible to get a loan if you are self-employed. However, with zero proof of income, it may be challenging to gain approval for a loan. To improve your odds of approval, you may consider adding collateral to the loan or applying with a cosigner.

Are there any loans for self-employed people with bad credit?

While a strong credit history can help strengthen a loan application, it’s not impossible to qualify for a loan with bad credit. If you can show a consistent and stable income history, that could help improve your application. If that’s not enough, another option may be to add a cosigner.

Can self-employed freelance workers get personal loans?

Yes, self-employed freelance workers can qualify for a personal loan. Instead of providing W-2 documents to verify their income, they will need to provide alternatives such as tax documents or bank statements. Applicants who have been working in a specific industry as a freelancer for two years or more may be viewed more favorably by lenders. Those with a strong credit score and history may qualify for more competitive rates and terms.

If a self-employed freelancer is struggling to get approved for a personal loan they could consider adding a cosigner to help strengthen their application.

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SoFi loans are originated by SoFi Bank, N.A., NMLS #696891 (Member FDIC). For additional product-specific legal and licensing information, see SoFi.com/legal. Equal Housing Lender.

Non affiliation: SoFi isn’t affiliated with any of the companies highlighted in this article.

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.

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While you may think of your credit card as what tends to break a budget, it’s actually possible to budget with a credit card to spend smarter. In fact, there are a number of advantages of budgeting with a credit card. If you spend only what you can afford to pay off each month, you can enjoy earning rewards, building your credit score, and accessing other perks without accruing interest.

It isn’t always easy to set — and then stick to — a budget though, and a credit card budget is no different. Read on for tips on budgeting with a credit card.

Why Use Credit Cards?

Although credit cards can have downsides — especially when someone tends to overspend — they also offer benefits that you can’t get when you pay with other methods. This includes:

•   Fraud protection: It can be easier to dispute charges and fraudulent activity on a credit card as opposed to a debit card or cash.

•   Opportunity to improve your credit score: When a credit card is used responsibly, it can build a person’s credit score.

•   Credit card rewards: Credit cards often come with perks like travel points or cash back.

•   Travel insurance: Some credit cards offer specialty protection benefits like travel insurance.

While you may think of your credit card as what tends to break a budget, it’s actually possible to budget with a credit card to spend smarter. In fact, there are a number of advantages of budgeting with a credit card. If you spend only what you can afford to pay off each month, you can enjoy earning rewards, building your credit score, and accessing other perks without accruing interest.

It isn’t always easy to set — and then stick to — a budget though, and a credit card budget is no different. Read on for tips on budgeting with a credit card.

Recommended: Does Applying For a Credit Card Hurt Your Credit Score?

Why Is Budgeting Important?

Whether using a bank account or credit card, a monthly budget is an essential part of financial wellness. Budgeting can:

•   Help to reach financial goals, such as establishing an emergency fund or saving for a downpayment for a home.

•   Alleviate financial anxiety that can come from uncertainties around finance.

•   Improve credit history through a record of on-time payments and responsible spending.

At first glance, budgeting may seem like a limiting factor, but it actually allows you to spend guilt-free. When budgeters know how much they can spend on certain categories each month and adhere to those guidelines, they don’t have to worry about overspending.

Specific Budgeting Methods You Can Work With

There’s no one-size-fits-all budgeting method. However, here are some popular methods that you might consider trying if you’re interested in creating a personal budget.

The Zero-Sum Budget

In a zero-sum budget, every dollar has a job. However, that doesn’t mean an account should be $0 at the end of the month. Instead, it means that every dollar earned should be allocated to a specific category, with no money left unassigned by the end of the month.

Each time an after-tax paycheck comes in, a zero-dollar budget will assign it to a category, starting with necessities like rent, food, student loan payments, and insurance. The rest goes toward discretionary spending or saving.

Zero-sum budgeting means taking a critical look at each dollar entering a bank account, which can feel frustrating for some but helpful for others. Depending on your preferences, this could be the right type of budget for you.

The Spreadsheet Budget

A spreadsheet or line-item budget groups spending and purchases into categories balanced against monthly post-tax income. In its most basic form, the spreadsheet budget is a list of expenses, shown line by line and grouped by type. Income covers expenses, with surpluses going toward additional savings or debt payoff.

The Online Budget

Apps and other digital tools make budgeting as easy as creating a log-in and connecting existing accounts to track spending. You can also set up budgets for upcoming purchases.

An online tool can be helpful for those who feel intimidated by budgeting prep or prefer a more passive look at spending.

11 Tips for Budgeting With a Credit Card

Using a credit card to budget isn’t so different from a traditional budget. Keep these 11 tips in mind when building a credit card budget.

1. Determine Your Monthly Income

To figure out take-home pay each month, budgeters can consult their bank account or look at paystubs from their employer (typically through an online portal). If your income varies each month, take the average income over the past year to get a rough ballpark figure.

2. Pick a Budgeting Method

A person can’t budget with a credit card if they don’t have a budgeting method in mind. Consider one of the aforementioned methods or an alternative like the 50/30/20 budget, where you allocate 50% of your budget to needs, 30% to wants, and the remaining 20% to savings.

3. Track Your Spending

Some budgeting methods are specific about how spending should be tracked. However, you can easily track your spending with pen and paper, a spreadsheet, or a spending app. No matter the method, it’s important to track each purchase.

4. Categorize Your Spending

When it comes to how to budget credit card payments, it helps to look back at your spending first. Gather financial statements from credit cards and bank accounts for the past month. Break each transaction into a category, such as needs, wants, savings, or something more specific.

With an idea of historical spending, now’s time to put a plan into place moving forward.

5. Create a Plan

Armed with a structure and an understanding of your past spending, now comes the time to plan for the future. When creating a plan, consider:

•   Recurring expenses

•   Savings goals

•   Debt repayment goals

•   Annual subscription costs

•   Emergency savings needs

6. Pay Yourself First

A top priority when budgeting with a credit card should be paying yourself first. That means that when money hits a bank account, it should go toward personal savings goals, an emergency fund, or an accelerated debt repayment plan.

It’s important to prioritize paying yourself first, as many try to budget with the reverse in mind, only setting aside what’s left over at the end of the month. This approach can lead to falling short on savings goals.

7. Calculate Your Expenses

After setting aside money for savings, it’s time to break down the remaining income into monthly expenses. This includes necessities like rent or mortgage payments and wants like dining out or entertainment.

If monthly income can’t cover all of the anticipated expenses, it may be time to cut back on spending. Is there slack in the budget from underused subscriptions? Or can grocery spending go down?

Figuring this out before you swipe can help you to avoid overspending on credit cards.

8. Plan for Debts

The difference between credit card budgeting and traditional budgeting comes when the credit card bill is due. If someone has been primarily spending on a credit card, it’s unlikely they’ll see their bank account change most of the month. However, that changes when the bill comes due.

With each transaction on the card, the budgeter should have enough money in their check or savings to cover the cost. Planning for this debt means avoiding the scramble that sometimes comes with a credit card due date.

9. Simplify Your Billing Schedule

Missing a credit card bill can harm a credit score and add financial stress to a person’s budget. Mark credit card due dates on the calendar each month, and consider paying the bill early or breaking it into multiple payments throughout the month.

10. Use Rewards as a Bonus

The benefit of budgeting with a credit card comes from the various credit card rewards you can earn. Remember to cash in on cash back perks every few months for a discounted bill or redeem the travel miles you’ve earned for an upcoming trip.

11. Avoid Carrying a Balance

Carrying a balance on a credit card could indicate an imbalanced budget due to how credit cards work. When a credit card bill isn’t paid in full, the remaining balance can accrue interest, leading to a ballooning balance that becomes harder to pay.

That’s why upfront planning is essential to budgeting with a credit card. Without a plan in place, there’s a bigger risk of overspending, which can snowball into credit card debt. If you’re using a credit card, it’s important to stick to one of the most important credit card rules of always trying to pay off your balance in full.

Recommended: How to Avoid Interest On a Credit Card

Pros and Cons of Budgeting With a Credit Card

There are benefits and drawbacks to credit card budgeting, including:

The Takeaway

There are advantages of budgeting with a credit card, such as earning rewards, gaining access to credit card perks like travel insurance, and building your credit score if you use your card responsibly. By setting up a credit card budget, you can better prevent yourself from spending more than you can afford and ending up owing interest when you can’t pay off your statement balance in full.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

How can I manage my budget with credit cards?

Budgeting with a credit card isn’t different from budgeting without one. The key to budgeting credit cards is not to spend more on a credit card than you can afford to pay off at the end of the month.

Should I budget with a credit card?

If someone can stick to a traditional budget, then budgeting with a credit card might make sense. The difference is remembering to stay up to date with payments, as missing a credit card payment can negatively impact a credit score.

How much of a hold does the budget put on your credit card?

Budget should have a pretty serious hold on a credit card. When people can’t pay their credit card bill in full, they’ll incur interest charges, which can cause them to fall into debt over time and potentially drag down their credit score.

How do credit cards affect my personal budget?

If a budgeter isn’t paying attention when using a credit card, it’s easy to overspend. This can result in putting more on a credit card than you have available in cash to pay it off. As a result, you may end up paying more than the sticker price for your purchases due to interest, leaving you less money leftover for your other needs and savings goals.

Photo credit: iStock/Mirel Kipioro

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Disclaimer: Many factors affect your credit scores and the interest rates you may receive. SoFi is not a Credit Repair Organization as defined under federal or state law, including the Credit Repair Organizations Act. SoFi does not provide “credit repair” services or advice or assistance regarding “rebuilding” or “improving” your credit record, credit history, or credit rating. For details, see the FTC’s website .

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No matter what you do, it generally costs you money to borrow money. In the case of credit cards, you’ll pay interest on any balance remaining after your statement due date, and you may also be subject to numerous other fees.

Understanding how much a credit card costs is important, as it can help you compare cards and choose one that’s right for you at the right price. Read on to learn more about the potential costs of a credit card.

How Much Does It Cost to Get a Credit Card?

The application process for a credit card is free. The process starts by choosing a card that offers the right terms, interest rates, and rewards, if applicable. For example, you may want a card that offers cash back on certain purchases, or if you travel frequently, you may want to choose a credit that offers airline miles.

Once you’ve decided on a card, the application will typically ask you for the following:

•   Name: Credit card companies will need your full legal name.

•   Address: Most credit card companies will require you to have a U.S. address.

•   Social Security number: The credit card company will use this to make a “hard pull” inquiry on your credit report, which will help them determine how risky it is to extend credit to you.

•   Employment status and income: This will help the credit card company determine how big a line of credit you can afford.

•   Country of citizenship and residence: Not all companies will offer cards to noncitizens.

•   Financial assets and liabilities: The credit card company will want to know what other debts you are currently paying off.

Though applying for credit doesn’t cost anything, that doesn’t mean that credit cards are free. Once approved, you do have to pay for having a credit card in certain circumstances.

Recommended: Does Applying for a Credit Card Hurt Your Credit Score?

Cost of a Credit Card: What to Consider When Choosing a Credit Card

The costs associated with maintaining a credit card are some of the most important points of comparison when choosing between different cards. Here’s how they can stack up:

Interest Rates

Credit cards work by charging you an interest rate, also known as annual percentage rate (APR) on credit cards. Interest applies when you carry a balance from month to month. If you pay off your balance each month, you won’t owe interest.

The average commercial bank interest rate on credit card plans for all accounts is currently 21.59%, according to data released by the St. Louis Federal Reserve. However, interest rates tend to vary from applicant to applicant, largely depending on their credit score.

The better your credit score, the lower the interest rate you may be offered. Banks tend to see individuals with lower scores as at greater risk of defaulting on their loans, so they tend to offer the applicants higher interest rates to offset some of that risk.

Balance Transfer Fees

A balance transfer credit card allows you to transfer the balance on your existing card to another card with a lower interest rate or no interest for a period of time. Most balance transfer cards will charge a fee from as low as 3% to as much as 5% in order to do so.

If you’re transferring a large balance, this fee can quickly add up to a hefty sum, so be sure to carefully compare the cost of the balance transfer to the amount you’d be saving on interest by switching to the new card.

Recommended: What Is the Average Credit Card Limit

Extra Charges When Spending Overseas

Foreign transactions fees are a surcharge that credit card companies tack on to purchases you make overseas that require the processing of foreign currencies or that are routed through foreign banks. These fees are typically around 3%, and if you’re a frequent traveler, they can start to add up.

Check the fine print in the terms and conditions before signing up for a card to see how much you’ll be charged. In some cases, your card may not charge anything.

Late Payment and Credit Limit Fees

Though you can carry a balance on your credit card, there is still a monthly credit card minimum payment that you’ll have to make. Do everything you can to make this payment on time. Not only can missed payments hurt your credit score, but your credit card company may also charge a fee. Miss another payment and that fee could go up. For example, while the late payment charge on your first missed payment could be $28, the second could jump up to $39. Typically, the late fee cannot be more than the minimum amount due on the account.

Another potentially painful side effect of missing a payment: Your credit card company could increase your interest rate, increasing the cost of your unpaid balance and making future borrowing more expensive.

Annual Fees

Annual fees help credit card companies cover the costs of whatever perks and rewards they offer their customers. The more perks a card comes with, the higher the annual fee may be. This fee is typically charged as a lump sum once per year, usually in the same month in which you opened your card, and you’ll pay it off as part of your regular credit card bill.

Convenience Fees

Sometimes you’re charged fees for using your credit by businesses that are not your credit card company. For example, a credit card convenience fee is a fee that’s charged by a merchant and added to the cost of a transaction.

Recommended: How Do Credit Card Payments Work?

Tips for Using Your Credit Card Responsibly

Credit cards are what’s known as revolving credit. They allow you to carry a balance from month to month, making only the minimum payment, and that balance can increase as interest gets added. The bigger your balance, the more money you’ll owe in interest, and your debt can quickly grow out of control. That’s why it is important to use your credit card responsibly.

Here are a couple credit card rules to consider in order to do so:

•   Always aim to pay off your credit card balance in full each month. For most cards, you will not owe any interest on purchases if you do, eliminating one of the biggest costs of having a credit card.

•   Avoid making purchases you won’t be able to pay off each month. Sometimes these expenses are unavoidable, especially in an emergency. If you can’t pay off your debt within a month, aim to do so as quickly as possible.

•   Make a point to review your credit card statement. While it might seem like a slog, reviewing your credit card statement can offer helpful insight into your spending habits. It can also ensure you notice any unauthorized credit card usage or a billing error, in which case you may be able to request a credit card chargeback.

The Takeaway

Maintaining a credit card typically comes with a variety of costs. In some cases, you can avoid credit card fees and interest, such as by paying off your balance in full and on time each month. Also be aware that interest rates and fees are often negotiable. If you’re a longstanding customer or have a particularly good credit, you may have a chance at having a few fees waived or at least lowered.

Whether you're looking to build credit, apply for a new credit card, or save money with the cards you have, it's important to understand the options that are best for you. Learn more about credit cards by exploring this credit card guide.

FAQ

Do you have to pay for a credit card?

Credit card companies may charge a variety of fees including annual fees and late payment fees. You will also have to pay interest on whatever balance you carry from month to month.

How much are credit card fees monthly?

Credit card fees are typically not charged on a monthly basis. For example, the annual fee is usually charged as a lump sum once each year. You may incur other fees, like late payment fees, only when you miss a payment.

Can I use a credit card for free?

If you pay off your balance each month, you may not owe any interest to your credit card company. However, you may still be on the hook for whatever fees your card may charge, such as an annual fee.

Photo credit: iStock/Meranna

Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

Third-Party Brand Mentions: No brands, products, or companies mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third-party trademarks referenced herein are property of their respective owners.

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It is possible to overdraft a savings account, which is when your balance drops below zero. This could happen if you forgot to deposit a check into the account and then transferred funds out, for instance. Or maybe you moved more money out of the savings account into your checking than you actually had. These and other glitches can leave you with a negative balance in your savings.

Consequences of Overdrawing a Savings Account

An overdraft occurs when there is a withdrawal from your account that results in the balance being below zero — sometimes called a negative balance. There are several ways this can happen. Maybe an automatic withdrawal was processed or you wrote a check against your savings account and you didn’t have enough in the account to cover the transaction.

When the negative balance kicks in, a couple of different things could happen next. Much depends on your particular financial institution and the terms you agreed to when you opened the savings account.

Among the possibilities:

•   You may be charged an overdraft fee: If you signed an agreement to opt into overdraft coverage, your financial institution will allow you to overdraft on your account, typically for a fee. (That is, they will authorize the transaction and allow for it to be completed, extending you a loan.) The amount of the fee will differ depending on your account and your bank. Some financial institutions may even charge you every day and/or for additional withdrawals while your account has a negative balance. Considering that the average overdraft fee is about $35, this cost can really add up.

•   Your transaction is declined: Your financial institution may decline the transaction if you don’t have overdraft protection. In this case, the transaction won’t go through. In addition, you could face a non-sufficient funds fee, or NSF fee. In many cases this amount is similar to an overdraft fee.

•   You have a linked account, and the linked account is used to cover the cost. This usually happens when you overdraw a checking account, and a linked savings account covers the difference. However, you may be able to link your savings account to another account (typically at the same financial institution) as a backup. If an account goes down to zero or below, then money would be withdrawn from the backup account to complete the transaction. In many cases, this service is free, though that depends on your bank.

Understanding Overdraft Protection and Fees

Financial institutions offer overdraft protection programs to help ensure your transactions proceed smoothly in case you reach a negative balance. These programs vary somewhat. Options may include linking a checking and savings account together — funds will be transferred automatically for the negative balance. Or the bank might allow the transaction to go through, and you’ll be charged a fee until you make up for the difference.

Federal regulations require banks to allow account holders to opt into overdraft protection for ATM and debit cards for point-of-sale transactions (or purchases). If you don’t opt in, you won’t be able to overdraft — your bank will deny the transaction. In this case, you won’t be charged any bank fees. However, this may not apply to recurring payments, bank transfers, or checks.

As we mentioned, your financial institution may charge you a fee for each transaction that involves overdraft protection, though banks typically have a maximum amount they’ll charge per day. For example, if you transferred $1,200 for your rent payment out of your savings, and you only had $1,000 in your account, you’ll have a negative balance. This results in a $200 overdraft (if you have coverage), plus you’ll pay about a $35 overdraft fee. If you don’t get paid until a week later to make up the difference, your account will continue to have a negative balance. Let’s say your bank ends up charging you a daily fee which adds up to an extra $10 for that week (this is just an example — it depends on the bank), totaling $45 in fees. And even if your bank denies the transaction, you may still have to pay the NSF fee, which could be about $35.

As you can see, overdrafting on your savings account can get expensive. That’s why it’s a smart idea to rectify the situation as soon as possible and prevent it from happening in the future.

Steps if You Have Overdrawn on Your Account

If you’ve overdrawn on your savings account, here’s how to get out of the negative-balance zone.

•  Deposit funds: Once you’ve overdrafted, make a deposit into that account as soon as possible. Doing so can prevent you from being hit with multiple overdraft fees, especially if you know you need to make more withdrawals in the next day or so.

•  Ask to have the fee waived: If this is the first time you’ve had a negative balance, you can contact your financial institution to request to have the fee waived. If you’ve been a loyal customer and have remained in good standing with your accounts up until now, the bank may not charge you.

•  Pay the overdraft fee: If your bank rejects your request to have the fee waived, it’s best to pay it as soon as possible. You can typically do that by making a deposit into the overdrawn account. While your bank likely won’t take drastic measures like closing your account, be aware that letting a bank account sit with a negative balance could wind up hurting your credit score if the matter gets sent to a collection agency.

•  Settle payment with the payee: If your payment didn’t go through, then you’ll need to contact the person or company you owe and make arrangements for alternative payment. Depending on the type of payment, you could face a late or returned payment fee, which you’ll also need to pay.

Tips for Avoiding Overdraft Fees

There are ways to avoid overdraft fees. Here are some methods that can help.

1. Sign Up for Text or Email Alerts for Low Balance

Many banks allow you to sign up for email or text alerts when your savings account reaches a certain threshold. By doing so, you have time to deposit additional funds so you won’t risk your bank account going to zero or a negative balance.

2. Check Your Bank Account Regularly and Review Statements

Logging into your bank account online or through your banking app allows you to quickly see your balance and any upcoming transactions. By keeping on top of your account, you’ll typically be able to see if you’ll need to have more funds on hand, and you’ll have time to make those deposits. You may find that checking your account balances a few times a week is a helpful habit.

3. Review and Compare Automatic Payment Dates to Withdraw Dates

Looking at when money actually gets withdrawn from your account will help you plan better. For instance, if you know you’ll have a few withdrawals totaling $600 on the 15th of each month, you can plan to make sure you have that much in the account then. (Having a buffer is nice, too, if you can swing it.)

4. Revisit Your Budget

Reviewing your budget occasionally will help you see whether you’re overspending in certain areas. If so, working to cut back on expenses can prevent overdrafts. This is especially important during times when basic living expenses can creep up and require budget recalibration.

5. Build an Emergency Fund

You’ve probably heard the advice that it’s wise to have a rainy-day fund with enough cash in it to cover a few or several months’ worth of expenses. Having this kind of buffer will help when unexpected circumstances arise. These situations could range from a big medical bill to your laptop dying to being laid off. Aim to keep your emergency fund in a separate account, far from your everyday accounts, so you’re not tempted to spend it.

6. Consider Overdraft Protection and Coverage

Check into what your financial institution offers in terms of overdraft protection or coverage, and see if it makes sense for you. This may involve opening what is essentially a line of credit, so proceed carefully and find out what it will cost you. Make sure you understand what your responsibilities are, including fees and when a withdrawal from a linked account may occur.

The Takeaway

Overdrafting on your savings account can happen, and it can result in fees. There are several smart tactics that you can use to avoid this scenario — and ways to cope if your balance does wind up in negative territory. Planning ahead for these kinds of money-crunch situations is a wise idea as life is full of unexpected expenses.

Choosing a bank account that covers you for a certain amount of overdrafts and/or one low to no monthly or minimum-balance account fees is another option you may want to explore as part of your money management strategy.

Interested in opening an online bank account? When you sign up for a SoFi Checking and Savings account with direct deposit, you’ll get a competitive annual percentage yield (APY), pay zero account fees, and enjoy an array of rewards, such as access to the Allpoint Network of 55,000+ fee-free ATMs globally. Qualifying accounts can even access their paycheck up to two days early.

FAQ

Can I overdraft my savings account at the ATM?

It depends on whether or not you have opted into overdraft coverage. Banks are required to allow account holders to opt into overdraft protection for ATM and debit cards for point-of-sale transactions . If you don’t opt in, you won’t be able to overdraft. Your bank will deny the transaction and you won’t be charged a fee. If you do opt in, the bank will allow the transaction and charge you an overdraft fee, which is typically about $35.

Can you go negative in a savings account?

Yes, you can go negative in a savings account. This might happen if you write a check for more than you have in the savings account, for instance. If the bank allows the transaction to go through, you end up with a negative balance in your savings account. In this case, if you’ve signed up for your bank’s overdraft coverage, you will be charged an overdraft fee, which is typically around $35. You may owe additional fees as well if you don’t put money into the account right away.

Photo credit: iStock/damircudic

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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.

SoFi® Checking and Savings is offered through SoFi Bank, N.A. ©2024 SoFi Bank, N.A. All rights reserved. Member FDIC. Equal Housing Lender.
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4.00% APY
SoFi members with direct deposit activity can earn 4.00% annual percentage yield (APY) on savings balances (including Vaults) and 0.50% APY on checking balances. Direct Deposit means a recurring deposit of regular income to an account holder’s SoFi Checking or Savings account, including payroll, pension, or government benefit payments (e.g., Social Security), made by the account holder’s employer, payroll or benefits provider or government agency (“Direct Deposit”) via the Automated Clearing House (“ACH”) Network during a 30-day Evaluation Period (as defined below). Deposits that are not from an employer or government agency, including but not limited to check deposits, peer-to-peer transfers (e.g., transfers from PayPal, Venmo, etc.), merchant transactions (e.g., transactions from PayPal, Stripe, Square, etc.), and bank ACH funds transfers and wire transfers from external accounts, or are non-recurring in nature (e.g., IRS tax refunds), do not constitute Direct Deposit activity. There is no minimum Direct Deposit amount required to qualify for the stated interest rate. SoFi members with direct deposit are eligible for other SoFi Plus benefits.

As an alternative to direct deposit, SoFi members with Qualifying Deposits can earn 4.00% APY on savings balances (including Vaults) and 0.50% APY on checking balances. Qualifying Deposits means one or more deposits that, in the aggregate, are equal to or greater than $5,000 to an account holder’s SoFi Checking and Savings account (“Qualifying Deposits”) during a 30-day Evaluation Period (as defined below). Qualifying Deposits only include those deposits from the following eligible sources: (i) ACH transfers, (ii) inbound wire transfers, (iii) peer-to-peer transfers (i.e., external transfers from PayPal, Venmo, etc. and internal peer-to-peer transfers from a SoFi account belonging to another account holder), (iv) check deposits, (v) instant funding to your SoFi Bank Debit Card, (vi) push payments to your SoFi Bank Debit Card, and (vii) cash deposits. Qualifying Deposits do not include: (i) transfers between an account holder’s Checking account, Savings account, and/or Vaults; (ii) interest payments; (iii) bonuses issued by SoFi Bank or its affiliates; or (iv) credits, reversals, and refunds from SoFi Bank, N.A. (“SoFi Bank”) or from a merchant. SoFi members with Qualifying Deposits are not eligible for other SoFi Plus benefits.

SoFi Bank shall, in its sole discretion, assess each account holder’s Direct Deposit activity and Qualifying Deposits throughout each 30-Day Evaluation Period to determine the applicability of rates and may request additional documentation for verification of eligibility. The 30-Day Evaluation Period refers to the “Start Date” and “End Date” set forth on the APY Details page of your account, which comprises a period of 30 calendar days (the “30-Day Evaluation Period”). You can access the APY Details page at any time by logging into your SoFi account on the SoFi mobile app or SoFi website and selecting either (i) Banking > Savings > Current APY or (ii) Banking > Checking > Current APY. Upon receiving a Direct Deposit or $5,000 in Qualifying Deposits to your account, you will begin earning 4.00% APY on savings balances (including Vaults) and 0.50% on checking balances on or before the following calendar day. You will continue to earn these APYs for (i) the remainder of the current 30-Day Evaluation Period and through the end of the subsequent 30-Day Evaluation Period and (ii) any following 30-day Evaluation Periods during which SoFi Bank determines you to have Direct Deposit activity or $5,000 in Qualifying Deposits without interruption.

SoFi Bank reserves the right to grant a grace period to account holders following a change in Direct Deposit activity or Qualifying Deposits activity before adjusting rates. If SoFi Bank grants you a grace period, the dates for such grace period will be reflected on the APY Details page of your account. If SoFi Bank determines that you did not have Direct Deposit activity or $5,000 in Qualifying Deposits during the current 30-day Evaluation Period and, if applicable, the grace period, then you will begin earning the rates earned by account holders without either Direct Deposit or Qualifying Deposits until you have Direct Deposit activity or $5,000 in Qualifying Deposits in a subsequent 30-Day Evaluation Period. For the avoidance of doubt, an account holder with both Direct Deposit activity and Qualifying Deposits will earn the rates earned by account holders with Direct Deposit.

Members without either Direct Deposit activity or Qualifying Deposits, as determined by SoFi Bank, during a 30-Day Evaluation Period and, if applicable, the grace period, will earn 1.20% APY on savings balances (including Vaults) and 0.50% APY on checking balances.

Interest rates are variable and subject to change at any time. These rates are current as of 12/3/24. There is no minimum balance requirement. Additional information can be found at https://www.sofi.com/legal/banking-rate-sheet.

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