Manage Your Checking Account Before it “Manages” You

You may say, “I don’t write bad checks. I have a monthly budget and I stick to it. I never overspend.” That is excellent. All consumers should take this approach to their budgeting and spending habits. However, keep in mind two things:

  1. Unexpected expenses do come up. You cannot budget for everything unless you have a crystal ball.
  2. If you are living paycheck to paycheck, it only takes one bad experience to throw your perfectly budgeted world into financial chaos.

As stressed multiple times throughout this web site, it is very important that you keep an emergency fund at your local bank (more on this below). Let’s look at a couple of common scenarios which can put you into a situation where your checks bounce and you start racking up overdraft fees. Keep in mind that the amount of the fee may vary from bank to bank, but regardless of the amount, it still hurts your personal finances.

  1. You have an unexpected expense, such as your car breaking down and you need it to get to work. You then dip into your available funds and forget to adjust your budget and replace the car repair costs in your checking account.
  2. Someone writes you a bad check and you spend the money as soon as it becomes available (A lot of consumers may not be aware of this, but because of banking regulations, funds may be available to you before the check has actually been “cleared” from the issuing bank). A week later, you get notice in the mail from your bank about the check. It was initially deemed good and deposited, but wasn’t actually good at all. Suddenly, the money you thought you had in your account is no longer there. Here is where your situation gets even worse. You may have already been charged an overdraft fee, but your bank may also charge you a fee for depositing a bad check. What?!? So, not only do you lose money that you thought you had, you also get penalized for someone else’s bad money management skills. Ouch! This is why it is critical to always make sure you only take checks from individuals you know you can trust. Cash, certified funds and online bill pay checks issued from banks are always the best forms of payment to accept. Don’t be worried about offending someone. They are not responsible for paying your bills. You are.

OK, Now that you already have an overdraft charge and possibly a bad check fee, What happens if you have other pending payments, like auto loans or debit card purchases against your expected balance? If your budget is tight, this can be catastrophic, especially if you have a lot of small items. The overdraft charge is going to be charged regardless of the size of each of the transactions. Which, often, makes the fee more than the amount spent! Don’t forget that retailers will also have fees for returned checks that you write them. Finally, if these outstanding transactions are on credit card and loan payments, you can be hit with a host of other problems:

  1. Late charges for payments not made on time.
  2. You may also have your interest rates raised on your credit cards for paying late. Always be sure to read your credit card agreements so that you know what to do in case something like this happens.
  3. Worst of all, if you don’t take care of the situation quickly enough, late payments may be recorded on your credit report, which can affect your ability to get mortgage loans, credit cards, insurance and other forms of credit in the future (as well as the interest rates that you will be charged). It may even affect future employment opportunities.

What should you do if your account has been overdrawn?

  1. Immediately Go to Your Bank: Go and explain your situation. Most people often get stuck paying fees, because they simply feel that they don’t have any choice. Wrong! If every decision was automated in banks, they would need a lot fewer employees. Your banker may be willing to work with you on the charges. If you have a good track record with managing the money in your account, they may be inclined to waive some or all the fees for you, especially if your situation was caused by someone else writing you a bad check. They may help you. They may not. But, you will never know unless you ask!
  2. Immediately Call Your Creditors and Those You Wrote Checks to: If you have bounced checks or declined auto-payments, you should deal with the situation immediately. The sooner you contact them, the more likely they will be willing to work with you. Credit card and loan companies prefer borrowers that communicate with them. It may hurt your ego a bit to call and ask for help, but ignoring the situation will only make your financial matters worse.

If you want to stop it from happening again, you must protect yourself. If you have a tight budget, overdraft protection may be a good solution for you. There are two main types:

  1. Credit Lines – In most cases, this is probably not your best option. A credit line is attached to your checking account and deposits money every time you overdraw your available funds. However, this is simply another variation of a credit card and requires self-control. If you already have a tight budget, the last thing you need is more credit debt.
    • Considerations:
    • It may prevent you from incurring overdrafts, but your account will probably be charged more than the actual draft from the line each time it is accessed (read the fine print). In other words, you still may incur overdraft fees, just smaller ones.
    • The rate of interest charged on these credit lines can be quite high. If you are not careful, you may just wind out with another bill that requires debt consolidation.
  2. Savings Account – This is a much better choice. As mentioned above, you should already have a emergency fund stored in a bank account to prevent yourself from needing to use a credit card, or worse yet, a cash advance. Your savings can be attached to your checking account and will be accessed each time you find yourself in an overdraft situation.
    • Considerations:
    • You may still be charged a smaller fee by your bank each time an automated transfer occurs, but it is still much better than the alternative. This should not be set up just to be an excuse for you to be irresponsible. Get yourself into a habit of budgeting your income and expenses and then sticking to your plan.
    • Federal Regulation D limits the amount of automated transfers you may have to six per month. This may seem like not very many. However, if you find yourself dipping into your savings this many times in a month, it is a pretty clear signal that you need to redo your budget. Six should be more than enough. Also, many banks start charging excessive use charges before you even get to six transfers. The lesson to be learned is the same as above; develop a budget and stick with it.

Related Services – The following directories provide a wide variety of financial programs for debt consolidation and other financial services, such as finding a second mortgage or health insurance coverage quotes.

  • Consolidate Bills – Credit cards and other debt getting out of control? Review this section for useful information and for making comparisons of debt consolidation programs and related programs.
  • Debt Settlement Programs – Too many bills to handle? Review a list of available firms and learn more about this service that uses debt negotiation to help people eliminate debts.
  • Debt Management – Do you have too many monthly payments? Visit this directory of sites in order to compare different debt management options that may be able to help you.

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