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Overdrafts on Your Checking Account

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Overdrafts on Your Checking Account

Good recordkeeping with the online tools available to you helps you keep close tabs on your money. Let’s take a look at an all-too-real example that results from poor management of a checking account.

Prices of three common things

Reasonable estimates for these items would be:

  • Binder @ $3.50
  • Slice of pizza @ $1.99
  • Shampoo @ $2.99

If the balance in the checking account was $1.00 before you made any of these purchases, the purchase of the binder would bring the account to a negative balance and trigger an overdraft fee of $35. Overdraft charges occur per item in most cases. So, the purchase of the slice of pizza and the shampoo would cause an additional overdraft and trigger two additional $35 overdraft fees.

Take a look at how this works when you account for the transactions and the fees.

Overdrafts are expensive

Why do they happen?

Overdrafts can occur from any type of withdrawal transaction you make. If you write a check or use your debit card to pay for something and you don’t have sufficient funds in your account, you will overdraw your account.

Most financial institutions have overdraft protection programs available. The most common is to link your savings account to your checking account so that funds are automatically transferred to your checking account when your balance falls below zero. The bank or credit union may charge a fee ranging from $7–10 dollars per transfer. This fee will be much more cost effective than paying $35 per overdraft.

Chronic check-bouncers get flagged

What happens when someone doesn’t keep good records and ends up bouncing checks or overdrawing their account frequently?

Check-bouncers may end up in ChexSystems

If a person ends up reported in ChexSystems, it will raise red flags. Their current bank can close their account, and any new institutions may not want to take the risk of having them as a customer because of poor management of their accounts.