How to avoid bounced checks and their fees

Some overdraft charges may be likened to loans charging 1,000% interest

Spending Smart

Your Money

July 17, 2005|By Gregory Karp

Many consumers are more likely than ever to overdraw their checking accounts and needlessly pay exorbitant fees and penalties.

When a bank customer's account is empty, the bank will cover a check, ATM withdrawal or debit card transaction without warning or notice. Then when the customer makes a deposit, the bank takes back the overdrawn money plus a fee - typically $20 to $35. Worse, it's a "service" the customer never requested, but some banks automatically attach it to accounts.

Many consumers would be better off if the bank just rejected the withdrawal request when there was not enough money in the account.

Consumers spend at least $10.3 billion a year on these types of "courtesy" overdraft protections, according to the Center for Responsible Lending. Though not technically loans, the fees can be equivalent to a loan with 1,000 percent interest.

A new faster check-clearing process also puts consumers at greater risk of incurring overdraft fees. The process, called Check 21, reduces the "float," the time between writing the check and having the money deducted from your account. For those living on the financial edge who count on the float, the result could be more overdrafts.

"The turnaround time can be reduced to as little as one day, and you don't know which checks that applies to. So there's a real danger to writing a check when the money is not in the account," said Greg McBride, an analyst with Bankrate.com.

With the average bounced-check fee now exceeding $27 - a record high according to Bankrate.com - here are ways to avoid bounced checks and overdraft fees:

Track your accounts. Although banks may charge exorbitant penalties, consumers aren't innocent victims in overdrafts. The fact that their accounts go negative in the first place suggests a level of financial irresponsibility or ignorance. Software programs such as Quicken and Microsoft Money make tracking transactions less painful because they can download activity over the Internet from bank, credit card and investment companies. Basic versions of the programs retail for $20 to $30, which means they pay for themselves if they save you from writing a single rubber check.

Otherwise, a computer spreadsheet, diligent attention to your checkbook or just pen and paper work, too.

If your accounting becomes messed up between monthly statements, check your balance by phone or ATM. Most banks offer those services.

Get on the same page. Joint checking accounts are ripe for overdrafts because a husband and wife are often writing checks on the same account. Without diligent bookkeeping, one won't know what the other is doing and could overdraw the account. Though sharing equally is a nice concept, it often works better if one person is in charge of tracking the accounts.

Use cash. Paying cash not only avoids changing the balance in your bank account, it could have the added benefit of causing you to spend less. For many people, it's harder to fork over dollar bills than to swipe a debit card. Carrying cash could cut down on impulse spending.

Use real overdraft protection. Instead of lending you money to cover overdrafts, banks can also be instructed to dip into another account, such as savings, when a checking account is overdrawn.

Try direct deposit. Automatically depositing your paycheck into an account can help avoid an overdraft because you didn't have time to get to the bank or ATM to deposit a check.

Keep a cushion. It's a good idea to maintain some leeway in your account of, say, $100.

Use check copies. Order checks with carbon duplicates, so you retain a copy every time you write a check.

Ask for a break. Assuming you haven't overdrawn your account before, the bank might give you a pass.

Gregory Karp is a personal finance writer for The Morning Call, a Tribune Co. newspaper in Allentown, Pa. E-mail him at yourmoney tribune.com.

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