Have you ever been hit by a charge for accidentally withdrawing more money than is in your checking account? If so, you know these fees can be quite high. With holiday shopping at its start, the Pennsylvania Institute of Certified Public Accountants (PICPA) offers the following advice so you understand how these fees work and how to avoid them. The holiday season is expensive enough without adding fees and penalties.
The Nuts and Bolts
When you try to withdraw more money than you have in your account, some banks will refuse the withdrawal (which they do when they return a "bounced" check for insufficient funds) and charge you a bounced check fee. Others may allow the transaction and charge you a fee for the overdraft. This can happen if you write a check for more money than is in your account or if you make a withdrawal using an ATM or debit card for an amount in excess of your account balance. You might also be charged a fee if an automatic or electronic payment puts your account into overdraft status. When you open your account, find out about the bank's policy so you are not surprised later.
This is important to know because a large overdraft fee can turn any purchase into an extremely expensive proposition. Let's say you use your debit card to buy a holiday card for $5. If your funds are very low and there's not enough in the account to cover the purchase, your bank could charge a $20 overdraft fee. In the end, you will pay $25 for that $5 card.
Keep Records Up to Date
To avoid these fees, be sure to record all your checks, debit card purchases, and ATM withdrawals accurately and quickly. That way you will have a clear record of how much money is in your account. If you get information from the bank about your current balance, remember that some checks or automatic payments may not have cleared yet. If you withdraw most of your current balance before outstanding checks or payments are cleared, you may be hit with an overdraft fee. Also, check your account statement each month when you receive it from the bank to see where your account stands and to ensure no errors have been made.
Look for Links
Find out if you have options for protecting yourself against overdraft charges. For example, the bank may allow you to link your checking account with your savings account or a credit card. If you withdraw more than you have, the bank takes the money from savings or charges it to your credit card instead of slapping you with a large overdraft fee. Some banks offer a line of credit that covers overdrafts. The bank may charge you a transfer or other fee for these transactions, but they are usually much lower than overdraft or bounced check charges.
Avoid the Bounce
Even if you have overdraft protection, your bank may not always honor a check or transaction for an amount that is higher than your current balance. It may depend on the size or circumstance of the withdrawal. If the bank does refuse a check or transaction for insufficient funds, not only will your bank hit you with a high charge, but in many cases you also will have to pay a bounced check fee to the intended check recipient.
Consult Your CPA
Unexpected fees and hidden charges makes managing your money difficult, especially around the holidays. When you have questions about handling your finances, remember that your CPA can help. Turn to him or her with all your family's financial questions. To find a CPA in your area, or to find resources on managing debt, visit www.picpa.org/moneyandlife