Being Smart with Your Checking Accounts
Other Checking Account Fees
Aside from any regular service fees your checking account might accrue, several other fees are imposed if you misuse the account. The most common fee is the overdraft fee, imposed if there’s not enough money in your account to cover a check you wrote. In common parlance this is bouncing a check, and in banker-talk it is an overdraft. The overdraft fee can be hefty, $25 or more, and to make things worse, you are often charged a bounced check fee by the merchant you wrote the check to. Bouncing a $15 check can cost you $50 in fees—clearly a horrendous waste of your money and something to avoid.
The best way to avoid overdrafts is to take charge of your checking account and always be aware of how much money you have in it. The Excel template presented later in this chapter is a great tool for doing this. If you never write a check for more than is in the account, you will never pay an overdraft fee.
Another way to avoid overdrafts is to get overdraft protection for your checking account. This service goes by different names at different banks, but the idea is the same. It is a line of credit that is attached to your checking account. If you do write an overdraft, the bank automatically advances enough money from the line of credit to cover the check. Usually this is done in multiples of $100. Then you repay this loan in monthly installments that are usually deducted automatically from the checking account. Of course you pay interest.
Overdraft protection is a good idea as long as you never or at best rarely use it. Why? The interest rates that banks charge for overdraft advances are usually pretty high, making this a bad way to borrow money. Unfortunately, some people get in the habit of using their overdraft protection on a regular basis as a source of extra cash. This is not a good idea!
I recommend getting overdraft protection but never using it. It is there to protect you from overdraft fees in case of an error. The only time I have ever used mine is when I wrote a check for $1,495.00 and then mistakenly entered $14.95 in my register! I thought my balance was fine, but without that overdraft protection, I would have bounced at least a couple of checks. Sure, I paid a few dollars in interest but I saved $50 or more in overdraft fees.
The third technique that can help you to avoid overdrafts is to use a debit card. They are covered in the next section.
Don’t Count on the FloatPeople used to sometimes use the float to help when finances were tight. Suppose you were going to receive and deposit your paycheck on Friday but needed groceries on Wednesday. You could write a check to the grocer, safe in the knowledge that by the time the grocer took the check to his bank, his bank processed it and sent it to your bank, and your bank processed it, your paycheck would be in the account to cover it. The advance of modern technology has doomed the float. In particular, with the advent of the Check 21 program as of October 28, 2004, electronic check processing and communication have essentially abolished the float, and you cannot count on any real delay in a check you write getting to the bank. |
Understanding Debit Cards
Most checking accounts give the option of a debit card. These cards look like a credit card and, from the shopper’s perspective, work virtually the same way. When you are shopping, hand the card to the cashier to pay for your purchases. Behind the scenes, however, a debit card is very different from a credit card.
When you make a purchase with a credit card, the company that issues the card pays the merchant and adds the amount to your balance. Each month you receive a statement and must pay off all or part of what you owe. In other words, when you use a credit card, you borrow the money.
In contrast, a debit card is connected directly to your bank account, either checking or savings. When the cashier swipes the card, the amount of the purchase is deducted immediately from your account. If there’s not enough money in the account to cover the purchase, the transaction is rejected. You can think of using a debit card as writing an “instant” check.
Debit cards have a couple of advantages over credit cards. One is that you cannot overdraw your account because you cannot spend money you don’t have when using a debit card. Some people who find it difficult to restrain their spending use a debit card in preference to a credit card for just this reason. Another advantage is that anyone can get a debit card while individuals with bad credit might find it impossible to get a credit card. Since there’s no borrowing of money involved, a debit card is risk-free to the institution that provides it to customers.
There are also some disadvantages to debit cards when compared to credit cards. An important one is that with a debit card you are always using your own money, while a credit card gives you free, temporary use of the bank’s money. Many credit cards offer premiums, such as airline miles or cash back, and debit cards do not.
Explore posts in the same categories: Taking Control of Your Bank and Credit Card Accounts