A generation ago, writing a check gave consumers a small window before the money actually came out of their accounts. Today, electronic check deposits mean checks come out faster than they ever have before—while paychecks may clear on the same day they did before. That makes it easier than ever to bounce a check.
In the short term, returned checks can cost a fee. But the long-term consequences can be much harsher. “Managing a checking account, or any transactional deposit account, well has far reaching effects for a person’s financial well-being,” says Tara Bersnak, former bank representative. Mistakes in this area can cause problems for years.
Immediately After a Check Bounces
When a vendor attempts to deposit a check and has it returned for insufficient funds, consequences start to kick in immediately. Your bank will levy a fine of $25 to $38 immediately. Meanwhile the vendor may also charge you its own fine. Or, they may try a second time to deposit the same check, in case new funds have arrived. This will result in a second round of overdraft fees.
If the check that bounced is a bill, you will also have a late payment record. This affects your credit, and may end in your account being sent to collections. It’s possible for a debtor to bring civil charges against you for not paying what you owe. Writing repeated bad checks can even result in criminal penalties.
When you find out a check has bounced, try to transfer money as quickly as possible to avoid additional fees for a second overdraft. You may want to call the vendor that cashed the check, to assure them they will be paid and make an agreement about when.
When You Have Multiple Overdrafts
One bounced check will result in some pain and hassle, but it’s unlikely to hurt you long term. If you have several, though, the consequences will begin to stack up.
While bounced checks on their own don’t affect your credit, that doesn’t mean they’re private. Ms. Bersnak says banks “can and do share when a payment bounces— returned ACH debits cause a financial institution to get fined by the federal reserve and the bank or credit union passes it along with a hefty fee, but the negative ramifications for a person’s relationship banking credit are more far reaching. A returned ACH debit can be the difference between approval and denial for a car loan or a credit card.”
Financial institutions keep track of your overdrafts through monitoring services like TeleCheck, ChexSystems, or Early Warning. If you have a number of checks returned, you may find you’re considered a bad risk by banks, creditors, and even merchants. Businesses may decline your checks and ask for a different payment method.
At Ms. Bersnak’s institution, “If a person has more than three returned ACH debit or checks in a 90-day period, they are automatically disqualified from opening a business deposit account with us. This is industry best practice and is common.”
That means that if you have aspirations of owning your own business, your bounced checks could stop you. Since having a business account was a prerequisite for paycheck protection program (PPP) loans, many business owners didn’t qualify because of past banking problems.
How to Avoid Bouncing Checks
The simplest way to avoid bouncing checks is to keep a cushion in your checking account at all times. If you’re in the habit of transferring money quickly into savings, leave a little behind, even if you don’t expect to need it. Deposit paychecks as soon as you get them, or set up automatic deposits.
Keep track of money going in and out of your accounts. With online banking, that’s easier than ever. Put your banking app on your phone and check your balance before you spend anything. Keep track of auto-payments as well, and keep a record of which day each should come out. If you own a joint account, make sure all account holders are aware of upcoming debits and the current balance.
When you open a checking account, you may have a variety of options to handle overdrafts. Overdraft protection means your bank will pay for your checks, even if you don’t have sufficient funds, but they charge a fee. This means retailers and creditors won’t even know your check should have bounced, but your bank will report the overdrafts just as above.
If your bank offers the option, link your account to a savings account or overdraft line of credit. This means your bank will pull from savings or give you a short-term loan to cover the amount.
Using a debit card instead of checks allows your bank to decline the card (if you select this option) rather than overdrawing your account. While it’s embarrassing to have to put items back at the store, it won’t hurt your financial record.
Financial Responsibility Starts Small
Avoiding bounced checks is a very basic level of financial responsibility, but it can start a journey full of positive changes. Ensuring sufficient funds for every check will save you money and improve your record with banks, businesses, and potential creditors. For more guidance along the way, contact us to reach a financial advisor.
Written by Sheila 9/7/21