Having a checking account allows you to conduct many financial transactions and provides you with easy access to your money. Nearly all banks and credit unions offer these accounts for a minimal fee, or no fee at all, as well as the added protection and services that a financial institution can offer.
However, if you're not able to balance the amount of money you deposit and the amount you withdraw, a checking account can turn into an expensive commodity. Pending transactions and outstanding checks can make it seem as though you have more money in your account than what you actually do, and if you spend too much, you run the risk of incurring hefty penalty fees or even having your account closed. To stay on top of your finances, it's worth keeping a personal record of all the money coming in and out of your account.
The Waiting Game
When you open a checking account, your bank or credit union is likely to issue you a debit card. These work much in the same way as credit cards: you can swipe them to make cashless purchases, or use their unique information to buy things online. However, instead of drawing from a line of credit, a debit card takes money straight out of your checking account. In one sense, this makes a debit card a far safer alternative to a credit card, as it won't run you into debt that you have to pay back later.
In one sense, this makes a debit card a safer alternative to a credit card, as it won't run you into debt that you have to pay back later. There are still risks involved with using debit cards. For one thing, they can cause you to overdraw your account if you don't keep track of your spending.
How is that possible? Well, debit card transactions take time to process, which can cause your bank to think that there is more money in your account than what there actually is. If you're not careful, it's possible to spend your money twice over—and incur overdraft fees when your debit card transactions finally clear.
How Overdrafts Happen
When you swipe your debit card to buy something, the total amount is placed on hold, but not actually charged until the merchant settles the transaction. Typically, this is done at the end of the day, along with everyone else's debit and credit card transactions, but it can take as long as a week. If you've ever gone online and looked at your account activity, you might have seen the words "pending transaction" attached to a recent payment.
When the merchant eventually settles your transaction, the "pending" label disappears, and that's when the money is deducted from your account. Until then, you need to make sure that you have enough money available to cover your purchases.
If you don't have the money to cover that transaction, your bank can "lend" you the funds—and charge you an overdraft fee for doing so (depending on its policies). Since 2010, institutions have been required to get their customers' consent before offering this protection and allowing overdrafts; however, many opt in to this coverage for the peace of mind.
Unfortunately, this ends up costing them. That's because overdraft fees aren't necessarily cheap. The Consumer Finance Protection Bureau reports that the median fee is $34, and nearly 20% of consumers who opt in to this coverage overdraft more than 10 times per year. That's more than $300 in fees alone! Also according to the CFPB, the majority of these fees were for transactions of $24 or less—meaning you might pay extra for something small you could have lived without.
Checks And Balances
Outstanding checks can also make your balance appear greater than what it actually is. These are checks that you have written and presented to whomever you wish to pay, but for whatever reason (no time, gardening accident, zombie apocalypse, etc.), have not been deposited or have not cleared with your bank. Like a pending transaction, an outstanding check can be a serious liability to your checking account if you don't have enough money available when the check is eventually cashed.
Most banks in the United States allow their customers to hold on to checks for up to 6 months before they are rendered "stale" and cannot be deposited. That means, if you don't keep track of whom you've written checks to, and how much those checks were for, an outstanding check can catch you off guard and suddenly deplete your account of available funds.
An Ounce Of Prevention
The easiest way to keep on top of your checking account is to sign up for online banking. This will give you access to an overview of your account where you can track all deposits and payments in real time and see those pending transactions, too.
You can also choose to pay your bills and send your checks electronically. Of course, written check registers are a great way to keep track of these transactions, as well. They also provide a useful record to compare with the bank's online record if you ever think you've found an error in your statement. Just remember, when a payment has cleared, mark it off so you know its status.
Finally, it's a good idea to keep a small retainer in your account at all times—just in case of an emergency. Pick a figure—say, $50—and try not to drop below it. While this won't protect you entirely from overdrawing your account, the added awareness should ensure you don't miss out on anything crucial.