We have all had to do it at some point you have an unexpected bill arrive, an emergency, you need groceries and you are tempted to overdraw your checking account. Do not do it! Unless you are in some dire emergency do not even think about doing this. Some people (usually us with the least amount of money) actually seem to view overdrafting as a type of credit line. Do not fool yourself! Not only is writing a bad check or making a purchase that you don’t have the funds for a punishable crime; it can generate hundreds of dollars in fees overnight.
Common Misconceptions
1)Overdrafting is not a form of credit
2)The bank is not going to call to warn you that your balance is low or that you are overdrawing your account. It is your responsibility to manage your account. At most you will probably receive a notice in the mail. It can take a few days to receive this by mail so you could have made several other purchases by then. Unfortunately, this is not the banks fault. You have to take responsibility in managing your money. (update: some banks have started offering balance alerts on accounts – but be aware – unless you have an additional account to transfer funds from, you probably will not make it to the bank in time to make a deposit).
3)Cash deposits go in immediately this is not always true. At some banks you can use your cash immediately, but be aware if you do not make your deposit by the banks cut off time, those funds will not cover any posting items that night, but your debit card purchases (that you thought you could use that cash immediately for) will be deducted from your balance or placed on hold, causing overdraft fees. Again, you agreed to all of this when you opened the account.
4)Debit/Check cards are not credit cards! Just because you choose the credit option you are not tapping into a credit line. The money comes from your checking account. People actually believe this and never question where they expect that money to come from. Also, at most banks there is generally no difference between the time frame for posting no matter which option you use.
5)Most banks have the right to offset. If you’re on a joint account with your brother and he has a separate personal account that he overdraws, they can take all of the money from your joint account (even though you didn’t do anything wrong). Doesn’t sound fair? Again, you agreed to this when you signed the papers. No, it’s not a scam, the bank is watching out for their interests. They will get the money that is owed to them. It’s basically the same as co-signing on a loan, unless you share joint expenses with someone, you shouldn’t do it. It can affect your credit and ruin your financial history.
6)Do you think you can get away with not paying the bank? Or that you can just stop using the overdrawn account and get another account somewhere else? That is completely untrue. If you don’t contact the bank to make a payment or a settlement, they will send you to collections just like any other creditor. If you ignore the creditor, it goes on your credit as an unpaid debt.
Here is a detailed example of how you can completely ruin your credit and be bombarded with fees (keep in mind, different banks have different procedures for applying fees):
You call in and check your balance Monday morning and you have $10. That is your money for until payday on Friday. You are very careful and only use your debit card to make small purchases such as snacks or sodas. Let’s say you make 10 purchases at $1 each. That should be okay until payday, you did not overspend. You are a great customer and you always write down your purchases. You know you are going to be at a zero balance, so you stop spending. Unfortunately, even though debit card purchases are usually deducted from your available balance immediately, they are not always processed immediately. Then a check you wrote a few weeks ago to your doctor’s office comes through (while some businesses are quick to process items, other’s may only make deposits once a week, or even once a month). This check was for $25. Our example bank posts items largest to smallest against the available balance and all of your items clear the same night. What that means is: your available balance shows a 0.00 balance, then your twenty dollar check posts followed by the 10 items for $1. (Again, you agreed to this policy).
You have now had 11 items overdraw your account and the bank actually returned a check. Even thought it was not paid, you still get a fee. At most banks this can range from $20 – $35. At Example Bank, you are charged $35 for each item that overdraws the account. That is 11 fees at $35 each. That’s $385 in debt overnight all for one overlooked check that had not cleared. And it’s not the merchant’s error, it’s not a bank error, it’s your error. You now owe the bank $385, that amount will be immediately deducted from your payroll or any direct deposit. You also owe your doctor the $25 plus any returned check fee that they charge (usually around $25). Because it’s your pay period, you had all of your utility bills set up to come out of the account automatically next week, plus you mailed in a credit card payment. Your paycheck was only $400 for the week, so you have $5 for the next week. Then the 3 utility payments come in and your credit card payment comes in that’s 4 more nsf fees at $35 each. All of those are going back to the payee and they have the right to continue to resubmit those until they are paid (most companies only do it twice), so they all come back through the next night. Then your doctor resubmits the original returned check plus an auto debit for his return fee (yes they can do that, and it’s considered a transaction by the bank so it will cause another fee). That’s six more overdraft fees. You now are negative with the bank again and owe them another $350 in fees, plus you have 5 outstanding items all of which are probably going to charge you their own companies returned check fees. Not only that, you have a late payment to your credit card company, which will show up on your credit and they are probably going to raise your interest rate. Plus, you are in the hole again and hopefully none of those items will be resubmitted so that when your next paycheck comes in for $400 , you will at least have $50 left to buy groceries for the next seven days. This domino effect can last for months and it will be almost impossible to stop. If you can’t pay the returned items you are subject to collection and termination of service from those companies and surprise more fees! They will charge you when they disconnect your utilities and when each item is sent to collections. If your checking account is still negative it can also be closed (and charged a charge off fee) and also sent to recovery. When you have a recovery account with a bank or an outstanding bad check, you are reported to a company such as Chexsystems. These companies keep a database of bad check writers (think of it as your check-writing credit report). You will most likely be denied opening an account with another bank until your bad checks have been paid. If you are able to open an account, any merchant that uses those databases to search for bad checks will deny the checks from your new account as well.
Now, you are sitting in the dark, no running water, you’re kid is crying, you’re hungry, your credit is ruined, is there any way things could possibly get worse? Absolutely, remember the bad check for $25, that original caused this downward spiral? The one that you could be subject to prosecution for? Well, your doctor’s office does not tolerate bad checks. Now there is a warrant out for your arrest. One bad check, even if it’s something you honestly overlooked can cause damage that completely runs out of control and affect you for years to come.
At this point you are probably terrified and ready to close your accounts and tuck your money under your mattress. Don’t it is possible to prevent and manage this type of situation.
Solutions and Tips:
1)A) Check on your bank’s options for overdraft protection. You can usually link the bank’s credit card or another account for overdraft protection the bank will generally charge a fee for transferring the funds. You must have the funds available in your overdraft protection account for the amount you have spent plus the fee, otherwise it will not work. Also, keep in mind if you are already in a bind, the credit card option is not a good choice. It’s too tempting to spend that money frivolously and you are also charged finance charges and interest by the credit card.
B) If you know you are going to overdraft in advance, transfer funds. Transfer enough money to cover the items you plan to purchase in case your bank has a funds transfer fee.
C) Now, you have overdraft protection don’t use it! This is for emergencies, if you use this as part of your spending account, it will defeat the purpose of having it. You can keep a small amount in the account, but I recommend adding at least some money to it when you get paid.
2)Do not post date checks. This is an outdated system of making payments. This is considered writing a bad check. Most banks will not cash the check *if* the teller notices the date, but if the check is deposited or is submitted for payment, they are obligated to pay it. Post dating is now only agreement between you and your payee. If at all possible do not write or mail checks until you have the funds in the account to pay them.
3)Write down everything and make sure it clears. If something is taking an unusually long time to clear, contact the payee to find out if they have received the payment. If not, it may be necessary to place a stop payment (another fee from the bank), which is better than forgetting the check and letting the above scenario take place.
4)Keep reserve funds. Keep an extra twenty in your wallet or purse that you only use in case of emergency. If you need to make a last minute deposit, you can do so.
5)Read everything you sign and open the mail that you receive from the bank. You can opt out of promotional mail, but it is important to open your statements and read notices from your bank to be aware of any new fees or policies.
6)Be familiar with your account features. Read all of the information you receive when you open your account and don’t let the representative rush you. They are not required to go over everything (although a good banker would) because it is provided in the packet.
7)Questions to ask when opening an account:
a)Is there a monthly service fee?
b)Is there a minimum balance requirement in order to avoid that fee?
c)Is there a limit on the number of checks/purchases I can make? Some interest bearing accounts such as high performance money market and savings accounts are only allowed a certain number of transactions per statement cycle due to government regulations.
d)Inquire on how the bank processes overdraft charges. Does it post against the available or posted balance? Do they charge fees per item or per day that you are overdrawn? Both?
e)Do they charge a fee for using another banks atm? Visa may also charge a service fee if you use your card outside the U.S.
f)Do you get any free services with the account or card? (Free checks, rewards programs, atm fee rebate, etc.)
g)Do they charge a fee when you call the bank? Do they charge a fee if you transfer funds over the phone? Use automated or online systems unless there is a problem on your account.
h)Do they offer free online banking services? A free automated line?
i)How much are you liable for in the event of fraud?
j)What are the fees for incoming and outgoing wire transfers? Most people are surprised that banks usually charge a fee for an incoming wire.
8)Are you in an old or grandfathered account? Meet with your banker to discuss new account options. If you are in an outdated account you may be paying a lot of extra fees with no benefits. You should not have a limited number or be paying for teller transactions. If you keep a large balance in a free checking account you need to find a better account. Even if you don’t feel like the interest is enough of a reason to change your product, there are usually other benefits such as free checks, an extra free checking or savings account, a free safe deposit box, etc. Just remember to keep the required balance to avoid a service fee.
9)Try to keep a “cushion” in the account, most people use their money until they get to the very last cent, this is too risky. Although you may feel like you don’t have an option, the consequences are too risky. Let $50 or $100 be your “zero” balance, when you get down to that amount, stop spending.
10)Be very careful who you give your account information too. Never sign up for “free” or trial offers using your debit card or checking account number. Once they have your account number they can start charging you for services even with different companies. Unfortunately, if you have given them your information, it is not considered fraud; by giving your account number you have given them authorization to use it. In this case, the bank can only dispute the charge for you.
11)Be very wary of potential scams do not provide your account number to anyone who asks for it over the phone or the internet. Your bank will never request this from you. If you receive an email saying your online banking is closed, it’s more than likely a phishing scam. Do not click on a link in the email and do not enter your information. No, you did not win the international lottery, no some guy in Nigeria’s uncle did not die and he can’t access the funds so he needs you to cash or deposit a check into your account and send part of it back. This doesn’t make sense or even sound rational. It is a scam. Why would a total stranger trust you with $1,000s of dollars and let you keep a profit? Because they are going to take the money and run. Your account will be debited when the check returns as counterfeit and you will probably be liable for paying it back.
12)Be careful with automatic payments, unless you keep a large back up in your account, these can be problematic. If you end up not having the funds for a payment, the company will still try to deduct it. If you are going through a hard time cancel your automatic payments and try to make payment arrangements with your billers. Also, notify the company immediately if you need to cancel an auto debit or credit, sometimes it can take several days or even weeks for these requests to process. In the meantime they will hit your account and cause overdraft fees.
13)Utilize online banking and bill payment services. They keep your payment information on file and you can send out a payment with almost no work at all (it also saves postage money). This is sometimes a better option than automatic debits from the biller if you are on a tight budget. Never call in to a company and make a payment over the phone before you have made your deposit, payments process a lot faster now.
14)Do not rely on online banking/telephone or atm inquiries for your balance. These are helpful tools, but they may not show all of your purchases. You have to write everything down and make sure it has cleared the account. If you have more than you think you should, then something has not cleared. The bank can not see checks until they post, we don’t know that you’ve mailed them and we can’t trace them if they are lost in the mail. It doesn’t make sense to even ask that.
15)Be careful with your debit card! It’s too easy to overspend.
16)Be mindful of “non-hold” transactions such as gas stations, convenience stores, car rentals, travel tickets, hotels, etc. They usually do not deduct immediately and can take several days to process. Again, if your balance is more than it should be, something is still out there.
17)Establish a relationship with your local branch. It’s so much easier and convenient to do everything online and over the phone these days and most problems can be resolved over the phone. However, your local branch may be able to do more for you in the case of an overdraft. Then again, some banks only refund fees due to bank errors. It doesn’t hurt to request a refund, but be nice. Customer service reps talk to hundreds of people a day about the same thing with the same sob stories. Unless it is a bank error, you are not entitled to a refund. If you call in with a bad attitude or start screaming because you are not eligible for a refund, you are going to miss valuable information on how to avoid this situation or to hear other options that may be available to you.
18)Most importantly! Make yourself aware of your banks deposit cutoff /transfer times and deposit hold policies. There is a government regulation that allows banks to hold your deposits under certain conditions it is possible that you may have to wait on a large item to clear for up to 2 weeks before you have access to the funds. Again, don’t make payment arrangements until you have made your deposit. Banks have cutoff times that affect whether or not your posting items will be covered. The time frames may be different if at the branch, atm, and online. Although funds may show up instantly, they may not be available to cover your posting items. If you need money to go shopping for the same day, don’t deposit your cash, you may not have immediate access. Keep what you need out so you can use it.
19)If you do overdraw your account take a breath. The first thing you want to do is try to prevent the domino effect. Put away your debit card and checks. Contact any business or person that you may have an outstanding check and see if the can possibly wait about depositing the item. If you are having trouble managing your checking account and getting overdrafts under control, you may want to use cash or money orders to make payments for a month or two so you can get things back under control.