Your Bank and Bounced Checks

If you’re like most people with a checking account, chances are you have bounced at least one check in the past. “Bouncing” a check – meaning that you wrote a check for more money than you had in your account – is at the least embarrassing and at the worst, possibly a very costly financial mistake. But bouncing a check is just one way that you can overdraw your account. You can also:

  • make a debit card purchase
  • make an ATM withdrawal or
  • make an automatic bank payment to

If you try to overdraw your account using a debit card, automatic bank payment or by ATM withdrawal those transactions may simply be denied. If you write a check for more than you have in your account your bank may simply return the check to the store or person to whom you wrote it marked “insufficient funds.” In that case your bank would charge you a fee for the transaction AND the person or company to whom you wrote the check may also charge you a returned check fee.

Another possibility, however, is that your bank would pay the check using something called overdraft protection.

A new federal law enacted July 1 concerning overdraft-protection plans may affect how your bank reacts –and what it could cost you – if you bounce a check or overdraw your account. Most banks have two ways of handling customers who overdraw their accounts: courtesy bounced-check protection and traditional overdraft protection plans. Let’s look at both.

  • Courtesy bounced-check protection. Most banks automatically extend some form of “courtesy protection” for accountholders who bounce an occasional check or overdraw their account another way. Your bank will cover your check (meaning pay the store or person to whom you wrote the check), but will then charge you an overdraft fee for each item – meaning each check presented, bill paid or debit card transaction. And banks typically set a limit on the total amount that your account can be overdrawn – for example, $300, $500 or $1,000 – including fees. In addition to the overdraft fee your bank may also charge a small daily fee ($5 - $15) for every day that your account is overdrawn. Bank rules vary so be certain you know how your bank handles bounced checks and what automatic protections, if any, you have through your account.
  • Traditional overdraft protection plan. A traditional overdraft protection plan is actually a line of credit or loan that you have to apply for with your bank. When you are approved, any amount that you overdraw your account would be covered with funds available through your line of credit. You will then need to pay interest on the loan and possibly an annual fee. It is important to remember that this is a loan. While it may be less expensive than risking mounting fees through courtesy bounced-check protection, it is still a loan that requires your application, approval and will cost you money in interest and possibly fees.

New rules enacted July 1 require that banks disclose their total fees and charges for overdraft protection (whether it’s courtesy protection or through a traditional overdraft plan) when customers open an account and in periodic account statements customers receive either electronically or by mail. In addition banks are prohibited from using possibly misleading advertising regarding their overdraft protection for bounced checks.

Whether you are considering opening an account for the first time, or if you already have a checking account, be clear about your bank’s overdraft policies and options for ensuring that you pay the least amount possible for accidentally overdrawing your account. Specifically, ask a bank teller or customer service representative:

  • How will I know when I have overdrawn my account? Will someone from the bank call or email me the day that I overdraw the account? Will my ATM withdrawal or debit card transaction alert me that I am about to overdraw my account so that I have the choice to cancel the transaction? Will I be alerted electronically when an automatic bill payment would cause me to be overdrawn? Will I get a notice in the mail before I am charged for the overage?
  • If I bounce a check, or otherwise overdraw my account, how long do I have to deposit money into the account to cover the cost?
  • If someone presents a check I have written and there’s not enough money in my account, do you provide courtesy bounced check protection so that you will pay the person, store, to whom I wrote the check OR will you return it unpaid to the payee marked “insufficient funds,” and then charge me for the bounced check?
  • If you do provide courtesy bounced check protection, what penalties do you charge for the protection -- individual item fees, daily fees, etc.?
  • Do you allow me to overdraw cash from my account using my ATM card? What penalty is there for doing that?
  • Do you allow me to make purchases using my bank debit card for more than I have in my account or would the purchase be denied? What is the penalty for doing that?
  • Do you report any bounced checks or overdrawn account activity (either by debit card or ATM) to the credit bureaus?
  • Are deposits credited to my account on the same business day? If not, how long will it take to post a deposit to my account?
  • If I apply for an overdraft line of credit what interest rate would I be charged for money used from that line of credit to cover any bounced checks or overdraws?

In addition to courtesy bounced-check protection and traditional overdraft lines of credit, there are other options to covering the “gap” created when you accidentally overdraw your account. For example you could:

  • Link your savings account to your checking account. That way if you overdraw your checking account your bank could automatically transfer funds from your savings account to cover the difference. Ask a bank representative if it offers this option and, if so, what fees it charges for the service.
  • Link your checking account to a bank credit card. Some banks will allow customers to link their checking accounts to a bank-issued credit card (for which you will have to apply and be approved for). Then if you overdraw your checking account that amount would be applied as a cash advance against your credit card. Be very careful, however, because you will have to pay a cash advance fee on the card and interest on the charge, and interest rates for cash advances are typically much higher (19% and higher) than interest charged on purchases.

While it can provide some peace of mind to know that you have a something in place to cover an accidental overage (like courtesy bounced check protection, linking an account to a credit card or savings account or having an overdraft line of credit), it is not substitute for carefully monitoring your account, balancing your checkbook and ensuring that you do not overdraw your account. Anytime you overdraw your account you are going to have to pay more for the transaction because of fees, penalties and/or interest. That money can add up very quickly and create a cycle where it becomes difficult to work your way back out of a negative checking account balance. Deposit money in your account as soon as you are aware that you have overdrawn the account to prevent mounting fees and penalties.

To avoid the future possibility of bouncing a check be sure to:

  • Enter all checks, ATM withdrawals and deposits (and ATM fees!), online bill-paying fees, and debit card purchases in your check register.
  • Balance your checkbook at least once a month against the account statement that your bank sends you. You may discover additional fees charged (i.e. monthly maintenance fee, check order fee, etc.) or deposits posted (i.e. if you have an interest-bearing account) to your account that you were not previously taking into consideration when you wrote checks.
  • Ask your bank to clearly outline what regular fees you are responsible for with the checking account you have selected.
  • Make sure you are clear on how long it will take when you deposit a check for it to be posted to your account so that you don’t accidentally overdraw your account because you thought the check had already posted. Most banks post any deposits that you make after 2:00 p.m. on the next business day so, for example, if you made a deposit at 3:30 p.m. on a Friday it might very well not be credited to your account until Monday morning at the earliest. Check too about your bank’s policy on large deposits – it may put a “hold” on the check for longer than 24 hours which will affect your balance and could cause you to accidentally overdraw your account.

Click here for our helpful article on “How to Balance a Checkbook” to boost your confidence about how to best manage your checking account and avoid the embarrassment, and cost, of bouncing a check.