Chapter 2: Checking Account Management

Having a checking account makes life much easier – and it is much safer than keeping your money under your mattress – but many people get into trouble by failing to follow the golden rule of checking account management: ensuring that there is enough money in your account to cover your transactions. What exactly happens if you do try to use your debit card or write a check when you do not have enough money in your account? That depends on the way your account is set up:

• If you elect not to allow overdrawing as a feature of your account, your balance cannot go below zero. Your debit card transactions will be denied, and your checks will bounce. For each check that you bounce, you can be charged a NSF (non-sufficient funds) fee. If you frequently write bad checks, you could lose your account, and you could even be subject to legal actions.

• If you elect to allow overdrawing, your balance can go below zero, so debit card and check transactions will not be denied even if you do not have the funds in your account. (However, your account may have a limit as to the amount you can be overdrawn.).

• If you do not have overdraft protection, you will likely be charged a fee every time you overdraw your account. Furthermore, the money that you owe to your financial institution (the amount you are overdrawn) can be deducted from your account immediately the next time you make a deposit. Like when you bounce checks, your account could be closed if you routinely overdraw your account.

• If you have overdraft protection, your checking account is linked to your savings account, credit card, or a line of credit, and the amount that you overdraw is automatically deducted from or charged to that. There is often a monthly fee for this service, but it is usually less than overdraft and bounced check fees.

Having overdraft protection can shield you from being charged high fees and having your account closed, but the best option is to not overdraw or bounce checks in the first place. Remember, when you overdraw your account, you are not given free money – you must pay back the amount you overdraw.

Monitoring your account balance is a good way to prevent overdrawing or bouncing checks. Is it necessary to check your balance every time you want to buy a $1 pack of gum or $3 magazine? No, but it is a good idea to do so whenever you are not sure if there is enough money in your account. In this day and age, knowing your balance is a snap – most financial institutions will let you check it over the phone or on-line. (Remember to subtract from your balance the amount of any automatic debits that will occur before your next deposit and outstanding checks.) It can also be helpful to have a cushion of a few hundred dollars in your checking account – if you typically only have $3 left in your account before the next payday, you are more likely to overdraw than if you have $300.