Back in the Black: Tools to Keep Your Checkbook on Track

Ever bounce a check? If you're like most Americans you probably answered yes. In fact, Americans bounce more than 125 million bad checks each year. With so many online transactions and so many weekly trips to the ATM (automated teller machine), keeping track of the balance in your checkbook can become a guessing game--one that becomes expensive if you're not careful.

A bounced check every now and then could be a fluke. But if you're seeing more of these than ants on honey, crack down and take control. Start by keeping a balanced checkbook; being diligent in recording debit card transactions, ATM transactions, and other fees; and keeping better records overall. But if there's still a little bit of bouncing going on, consider using these tools:

Overdraft protection

Overdraft protection kicks in if you've prearranged to have funds from one account automatically transfer to your share draft/checking account when you don't have enough in your checking account to cover a transaction. Money usually transfers in $100 increments.

Often, consumers acquire this protection for "just in case" circumstances--just in case your checking balance is lower than you thought. At some credit unions you'll have to request this service and choose which account the transferred money will come from; at others the credit union automatically sets it up for you.

Overdraft protection will cover you if you make an honest mistake, such as forgetting to make a deposit into your account before leaving on vacation. Or, you might forget to record an ATM withdrawal, or deposit a check that doesn't clear in time to cover checks you've written.

According to Bankrate.com, nearly half of the people who have overdraft protection make use of the service every month.

The best thing about this service is it helps avoid overdraft fees. For instance, if you write a bad check, you could end up paying the financial institution anywhere from $17 to $32, according to CUNA's 2002 Fees Survey Report--on top of a $50 to $60 fee to the merchant for the returned check. Keep in mind that credit union fees for nonsufficient funds typically are much lower than banks' fees.

If you write a bad check to your mortgage company, you also might be hit with a late payment fee of $50 or more.

Line of credit

If you're in a pinch for money, a credit union line of credit can help.

A line of credit generally covers amounts higher than those associated with the occasional bounced check.

"You apply for a line of credit, just as you would apply for a signature loan--and it's just as easy," says Kim Sponem, president and CEO of CUNA Credit Union in Madison, Wis. You'll have an available line of credit with a maximum line amount, for example, $5,000. If you overdraw your share draft/checking account, the credit union transfers a matching amount from the line of credit into your checking account.

While this service generally means avoiding bounced check fees, keep in mind that interest rates on a line of credit can run as high as credit card rates--or higher. A line of credit is different from a home equity loan in that a line of credit is not secured. A home equity loan may carry a much lower interest rate, but is secured by your home.

"A line of credit also is beneficial to consumers who instead might be tempted to use a payday lender," says Sponem. Payday lenders, competing in a multibillion-dollar industry, charge consumers hundreds of dollars in fees--sometimes equivalent to interest rates as high as 470%. Payday lenders frequently assess fees of $10 to $35 per $100 borrowed.

A line of credit is a better option and comes at a much better rate.

Courtesy pay

Should you inadvertently overdraw your checking account, programs such as courtesy pay can help. Courtesy pay programs, also referred to as overdraft privilege or bounce protection programs, work like this: Funds for overdrafts first will come from your overdraft protection; if sufficient funds aren't available, the credit union may elect to cover your overdrafts up to a certain amount.

"Courtesy pay, like overdraft protection, can save you the embarrassment and inconvenience of a returned check as well as the fee normally charged to you by merchants for checks returned to them," says Kim Andracsek, vice president of marketing, St. Louis Postal Credit Union.

Courtesy pay fees generally will be a lot less than the fees you would accumulate without this protection. The fees might be more than the financial institution's charge for nonsufficient funds, but less than the total NSF fee plus the penalties that merchants or other businesses impose for receiving a bad check, Andracsek adds. For example, without the service you might pay a $15 to $25 returned check fee to the financial institution, as well as a $20 returned check fee to the merchant--totaling $35 to $45. A courtesy pay program might charge $15 to $25.

Offered at many credit unions, courtesy pay options generally are available to members in good standing who already have overdraft protection. The programs generally feature multiple tiers based on member risk.

"Members who strongly benefit from these programs are those who use automatic bill payment services," says Andracsek. If you're using a bill payment service, your bills automatically are paid every month by the vendor or by ACH (automated clearing house). Say you forget to deposit your paycheck because you're in a hurry to go out of town. You won't have enough money in your account for the automatic bill pay to go through. Courtesy pay could help you out--after your overdraft protection kicks in.

These tools can help you stay on track, but the best way to stay on top of your finances and prevent being overdrawn in the first place is to be aware of what you're spending--every day. If you frequently use your debit and ATM cards, focus on recording every single transaction in a timely manner. And eliminate missed deposits by setting up an old service standby--direct deposit.

January 5, 2004