Checking Accounts: New Rules, Old Rules, Your Rules

Did anyone ever give you a user’s manual for your checking account?

Probably not. There are best practices in managing a checking account, but even if you learned the rules from your parents or through your own hard-won experience (or if you never did), it may be time for a little checking account check-up.

Why? Because some of the rules for checking accounts no longer apply. Financial regulation, market conditions and technological developments have all changed some of the ways you should think about managing your checking account.

Here are today’s rules — some new, some old, and some a matter of personal choice — for managing your checking account.

New rules for checking accounts
Don’t be pressured into opting in to overdraft protection. The Federal Reserve now requires U.S. banks to have customers actively opt in to overdraft protection before applying that protection to their checking accounts.

Banks very badly want you to opt in, because the fees are so juicy — a survey of bank fees released in July 2010 found that the average overdraft fee was $29.26. Although this fee could very well lead to the proverbial $30 cup of coffee, a poll by the National Foundation for Credit Counseling found that more than a quarter of Americans plan to opt in to overdraft protection.

Don’t opt in to overdraft protection without thinking long and hard about whether it makes sense for the way you use your account — more on this below.

J.D.’s note: If you struggle with overdrafting, check out my advice on how to avoid overdraft fees.

Keep a large cushion in your checking account. Conventional wisdom was that you should keep your checking account balance at a minimum, so more of your money could be earning high interest somewhere else.

These days, though, with the FDIC reporting that the national average for savings account interest rates is 0.19 percent annually, you won’t be missing out on much interest if you keep more money in your checking account.

Having this cushion — large enough for you to avoid overdrafts entirely or not worry about monthly maintenance fees — can more than make up for the lost interest. Rather than thinking about bank fees as a few dollars here or a few dollars there, think about them as negative interest — so a single month’s $10 maintenance fee really sets you back.

Make use of banking technology. Debit cards have accelerated the pace of banking. Aggressively use technology like online banking, electronic expense tracking and mobile alerts to accelerate the pace of your account monitoring. There’s no reason not to check your checking account balance every morning, especially if you are going to be using your debit card that day.

Oldie-but-goodie rules for checking accounts
Some rules for handling checking accounts are timeless.

Balance your account. If you simply rely on the bank’s records, you will be less alert to possible fraud or new fees on your account. Keep your own set of records, and check it against the bank’s record at least once a month. Is that extra work? Yes. Do banks sometimes make mistakes? Absolutely.

Shop around. Not all checking accounts are created equal. The July 2010 bank fee survey found that 44.2 percent of checking accounts have no monthly fees, but on other accounts those fees can range as high as $50 — that would come to $600 a year. Overdraft fees can be as low as $18 or as high as $35 dollars.

Comparing checking accounts for the lowest fees and terms that fit your banking habits can make a huge difference.

Protect your data. Make sure you are using a secure Internet connection before accessing your account online, and avoid using public computers for online banking. If you use old-fashioned paper checks, mail them in a secure mailbox — bill payments usually look obvious and are a favorite target of fraudsters.

Your rules for checking accounts
Some ways to best manage a checking account depend on your own habits and preferences.

Figure out how your usage patterns affect your fees. Bank fees come in a variety of flavors — monthly maintenance fees, overdraft fees and ATM fees, to name some common examples.

Identifying the “lowest-fee” checking account depends a lot on how you use the account. If you never overdraft your account, you might not mind an account with high overdraft fees, and you could even opt in for overdraft protection just to be on the safe side. If, however, you are a serial overdrafter, you’d better look for low overdraft fees — or seriously consider not opting for overdraft protection so you will be forced to break this bad habit.

Find a record-keeping method you will stick with. The “on-the-fly” nature of debt card transactions causes many people to neglect their recordkeeping, but you can’t manage your finances responsibly without good information.

You can bring a paper register with you to record transactions as you make them, get fancy with a smartphone app or simply keep your receipts in your wallet and sit down at the end of the day to log them in. (There are a number of tips and tricks offered by others to track your spending. Monitor your balance and transactions in whatever way works for you, but stick with it.)

Leave home without it. One old ad campaign for a major credit card advised, “Don’t leave home without it.” A newer one asks, “What’s in your wallet?” The common theme is that credit and debit cards should accompany you wherever you go.

If you’re prone to compulsive spending, however, you may want to rethink that. Try going cold turkey on carrying your debit card around now and then, and see if you spend less money as a result. If you find it helpful to use cash, try the envelope system.

Checking accounts are both a tremendous convenience and a potential source of financial trouble. Following a few simple rules for handling your checking account will help give you the convenience without the trouble.

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There are 20 comments to "Checking Accounts: New Rules, Old Rules, Your Rules".

  1. Des says 12 October 2010 at 13:11

    I’m sorry, but this is hogwash. Every bank I’ve ever banked with (about half a dozen) has had offered an overdraft line of credit with their checking accounts. If I overdraw, it just pulls from that account and charges me interest. Rather than a $30 fee, I pay a couple cents of interest. That way, I can keep my money elsewhere making me money rather than sitting in a checking account. There is no need for large amounts of money to be sitting earning nothing. This isn’t new, and it is not rare. Why wouldn’t this be mentioned?

    Also, in my opinion, the “new rules” make balancing a checkbook and writing down every transaction obsolete. I look at my account every day online. When a charge shows up I don’t recognize, I investigate. Periodically, I import my transactions to Mint. This is much more efficient than writing down every transaction and then manually doing the math.

  2. chacha1 says 12 October 2010 at 14:03

    Allow me to retort. 🙂 My bank certainly does offer an overdraft line of credit – if you maintain a minimum average daily balance in checking of over $1000; AND have a savings account with the bank; AND have direct deposit.

    Just because you have a certain service available to you doesn’t mean everyone else does. Those restrictions on my bank’s overdraft LOC would make it accessible to me – but I don’t need it because I don’t overdraft. Because I write down every transaction and balance my checkbook.

    And not everyone is in the situation of being able to look at their accounts online every day. The advice in this article is appropriate for most of us, but particularly to those who don’t have office jobs with ample free time and Internet access.

    Labeling something as “hogwash” just because you think it doesn’t apply to you is not constructive.

  3. Nicole says 12 October 2010 at 14:49

    I think I don’t understand. I’ve seen a lot of stuff about why not to say yes to the overdraft thing but I haven’t seen anything that really lays out the pros and cons.

    I know that the overdraft thing is bad if you use a debit card a lot… but I don’t use it at all. I use checks (and electronic one-time billing, which is like a check without the paper). I don’t want to accidentally bounce a check. The fee for check bouncing is very high, with both a bank fee and a merchant fee.

    Is overdraft protection appropriate in that case? Am I missing something?

    (In my specific case, it’s a fee of a few dollars to draw from saving to checking in an overdraft situation, not the $50 for a bounced check. It isn’t something I’ve done in years though.)

    I was really hoping this post would address both pros and cons for people in different situations after saying, “without thinking long and hard about whether it makes sense for the way you use your account – more on this below.”

    Please don’t attack me for being disappointed!

  4. chacha1 says 12 October 2010 at 15:22

    Hey Nicole, I’d agree the rest of the article didn’t really reference back to the overdraft question.

    It could be read as “if you keep a large cushion, and/or you check balances daily, and/or you simply don’t carry your checks/debit card, you don’t need overdraft protection.” But doesn’t explicitly say so. And as Des noted, overdraft protection doesn’t *necessarily* cost a lot.

    I don’t think overdraft protection is inherently bad, UNLESS it costs a lot. But often it conveys a false sense of security and a carelessness in handling the account.

    There are unfortunately some folks who don’t track their transactions, don’t monitor their balances, AND don’t have a cushion in their accounts – and they end up getting dinged over and over again with overdraft fees. In most cases, those are per transaction to the tune of $10 or more.

    If you’re a responsible money handler who prefers to pay by check, who can afford to keep a cushion in the account or who has a linked savings account, then to me it would make sense to have an overdraft protection mechanism in place just because check transactions can clear on a very unpredictable schedule, i.e. the $2500 mortgage payment might clear just BEFORE your paycheck deposit is credited. 🙂

  5. Nicole says 12 October 2010 at 17:23

    “if you keep a large cushion, and/or you check balances daily, and/or you simply don’t carry your checks/debit card, you don’t need overdraft protection.” seems pretty weak though… and not useful to me (to people in other circumstances, but not to me). I don’t want to check balances daily, but I’m fairly sure there are other situations in which overdraft protection might be useful. As would a comparison to the average check bouncing fee, if that is indeed the alternative to an overdraft by check (is it? The “pro” literature I got from our banks only addresses the embarrassment factor by being denied a debit transaction, nothing about check bouncing, which makes me wonder. And I’ve never bounced a check, but I have overdrafted to savings, but that was years ago, so I’m not exactly sure what that all entails.)

    Should I be comparing my overdraft fee to my check bouncing fee with whether or not I use a debit card or just checks, etc? Are there other factors I should be considering besides how willing I am to move money into checking rather than savings or to check my accounts every morning? What should be the framework for my thinking long and hard?

    What you’re saying, Chacha, is what my understanding has been, but I’m not actually sure if that is the correct understanding. I would like to have seen that addressed in the article.

    p.s. I did sign up for overdraft protection from our credit union with the low fees, but not with our big bank with the high fees. Hopefully nothing will ever be tripped.

  6. Slackerjo says 12 October 2010 at 17:35

    My rule. Don’t write cheques.

  7. jenk | sex & money says 12 October 2010 at 17:49

    Bank of America would charge overdraft fees whether it was refusing the payment (NSF) or transferring the money from the linked overdraft savings/credit card account. So the fees got charged either way.

    My credit union, on the other hand, doesn’t charge an overdraft fee if it transfers from the linked account.

    So yes, it depends. Also: if your overdraft protection goes on your credit card, are you paying interest on it? Some people say “Of course not!” because they pay their credit cards off each month. Others say “Well, you have to pay interest with a credit card…” because they can’t conceive of actually paying it off.

  8. andyg8180 says 12 October 2010 at 18:22

    If you dont mind sending checks thru the mail, i would suggest ally bank…… its free, they give interest, pay all your atm fees, and their overdraft fees are $9 total per day… i cant say anything bad about the bank except you cant really walk cash to that account… but i rarely ever have cash to deposit anymore

  9. sewingirl says 12 October 2010 at 18:27

    A lot also depends on how speedy your bank is updating the info you can access online. Our smalltown bank updates debits twice daily, but deposits only once. Limiting its usefullness. The fee to draw the money from the overdraft protection account is $15, the overdraft fee is $28. If the overdraft protection account is a regular savings account, there is a fee for more than 4 withdrawls in a calender month. The fee is $5 for each activity after the first 4. If you move money in and out of your savings a few times, and overdraw a couple, you may as well take the hit for the overdraft! Frankly my mind is boggled!

  10. Edward - Entry Level Dilemma says 12 October 2010 at 19:14

    @1 At my last bank (PNC), there was an overdraft line of credit from your savings account if you linked them. The fee for using this was $5, a lot less than the $29 for over-drafting, but still not free.

    A couple years ago, I forgot to enter a check in my register and it cleared my bank while I was in the middle of an emergency trip. I overdrafted by $100 over 6 transactions. By the time I was able to get my account back into black, I was charged $300 in overdraft fees (6 $29 overdraft fees, then continuing overdraft fees until I got paid again). So now I decline overdraft fees just in case I find myself in a similar situation in the future. I would rather have my card declined at the popcorn stand in the theater than get stuck paying the bank a few hundred dollars.

    My wife and I keep one month’s worth of bills in the checking account at all times. Even if we could have put that money in savings 3% interest, it only costs us about a meal at a nice restaurant per year (~$60)

  11. Nicole says 12 October 2010 at 19:16

    This article is interesting– from it it sounds like my understanding was wrong and the overdraft law only covers debit and ATM transactions, not checking. The link to savings is something different entirely.

    … so from this it sounds like if you never use your debit card, there isn’t really a problem no matter which you choose?

  12. El Nerdo says 12 October 2010 at 23:34

    Overdraft is just bad accounting– enabling bad accounting goes against good money habits. I recently declined the offer.

    I use my debit card almost exclusively and never overdraft. I only write one check a month. Besides having a budget, every time I’m going to go shopping I look at my bank, figure out how much I have and how much I can spend. There’s no “random shopping”– it’s all done very consciously.

    I carry $20 “shirt money” for emergencies. (“Shirt money” is what cab drivers–at least in DC— carry on themselves for when they get mugged, in order to avoid making a mugger angry). The $20 covers pretty much any random events.

    Anyway, $20 in my pocket and all expenses pre-planned. E.g., “no more than $100 at the supermarket” today. (We even know the prices of what we buy so we can predict how much we’ll spend as we plan our menus). Impossible to overdraft when you budget correctly. And in case of a big emergency, there’s a) the cash cushion, or b) the emergency fund.

    The cash cushion also protects you from unauthorized transactions– even if there is zero liability for fraudulent transactions with Visa check cards, they can temporarily lower your balance while your claim gets processed (24-48 hours).

  13. Karen in MN says 13 October 2010 at 01:32

    Overdrafting is just stupid. You just have to keep track of your money is all.

    I “opted in” for overdraft protection–because I never want to bounce a check. At my bank it just goes onto a personal line of credit–and yes, there is some kind of a fee. But I think it’s worth it for the rare situation where it happens accidentally.

    I don’t keep a cash cushion in checking–but I do keep a record of every check I write and I check my balance online frequently.

    My checking is totally free because I have other business with the same bank (mortgage). I haven’t been charged a fee for anything in years.

    I never use the associated debit/ATM card that my bank gives me for my checking account–If I need cash I just pick it up directly from the teller at the bank branch next door to where I work. Otherwise I use my credit card to pay for everything. Even if you don’t accidentally overdraft using your debit card, the ATM fees are outrageous, I hate having to remember the PIN, & then there’s the worry about the card getting stolen because there’s little fraud protection.

  14. Amber says 13 October 2010 at 06:32

    I keep a lot of money in my checking account because my “Rewards Checking” account pays a much higher interest than a regular savings account. The catch is that I have to accept e-statements, have a direct deposit, and have 10 debit transactions per month. DONE! I declined overdraft protection for myself.

    But I tend to agree that this article is lacking. “Keep a bigger cushion in your checking account” isn’t very helpful for someone who is just now seeing the personal finance light and doesn’t have extra money for the cushion and is probably still at risk of overdraft fees while learning to better manage their funds.

  15. the other Tammy says 13 October 2010 at 07:55

    Your friendly neighborhood bank teller will advise: BALANCE YOUR CHECKBOOK!!! Mistakes do get made. Debit card theft does happen. I’ve helped so many people who have no clue what is going on with their money, and when there is a problem, they have no records to back up their case. Missing $1000? Show me the register where you can prove that information. Give me something I can research to correct the problem, or you’re sunk.

    I also have to disagree with the “cushion”. If you are balancing correctly, you will balance to the penny. Every single person I’ve seen that has a cushion in their checking account can’t make their account balance. It only balances “kind of”. Kind of isn’t balanced.

    Ask your bank what services they offer to help you avoid overdrafts if this is a problem. My bank offers both the overdraft LOC and the linked savings account options.
    Also with the new Reg E overdraft options, make sure you know if you are opted in or opted out, and how it works. If you did nothing, it is required that they opt you out, meaning your debit card will reject any transaction that would overdraw your account.

    Talk to your bank and research your options. They are there to help you!

  16. El Nerdo says 13 October 2010 at 11:41

    @ Amber #14

    Good points, but you wrote this here: “But I tend to agree that this article is lacking. “Keep a bigger cushion in your checking account” isn’t very helpful for someone who is just now seeing the personal finance light and doesn’t have extra money for the cushion and is probably still at risk of overdraft fees while learning to better manage their funds.”

    I don’t think there is any excuse for overdrafts– it’s not a matter of having the money or not, it’s a matter of counting. I’ve had a ton of money and gone into overdraft, and I have been dirt-broke and never gone into overdraft. It’s actually when we have money that we become careless with it — “hey, we have a bunch of money, let’s buy this thing”.

    Anyway, I used to be a consummate overdrafter and now I walk the straight and narrow, so I know first-hand it’s just a matter of total discipline.

    People who don’t have the money should simply not write those checks–knowingly writing checks for which you have no funds is fraud.

    And people with little money should be the *last* ones to think about getting overdraft protection, because they don’t have the cash to cover the fees. Overdraft fees are the bank’s equivalent of the payday loan.

  17. Jessica says 13 October 2010 at 14:20

    @Nicole (#11), you’re right–the new regulations apply only to debit card transactions, something that is not at all made clear in the article.

    I’m not saying this to be mean, but for an article that’s claiming to be a newly updated manual for your checking account, it’s terribly misinformed and not at all clear about how new and existing rules affect your account. It’s not the level of writing I’ve come to expect from GRS.

  18. Tara C says 13 October 2010 at 16:35

    I balance my checkbook to the penny, and log on to my account 3 times a week to check that everything is the way I expect it. I declined the overdraft protection, I want them to decline my debit card purchase if I don’t have enough money on hand (although that only happened to me once when I forgot to record a check, but it cost me 3 escalating overdraft fees at BofA). Never again. I added my savings account as overdraft protection instead.

  19. brooklyn money says 14 October 2010 at 10:34

    I agree with Amber #14. The biggest innovation in checking accounts has been rewards checking. Many banks have them, and many are local banks not the mega institutions, so not only are you earning money (who would keep a lot of $ in checking to depreciate and not earn interest?), but you support community banking. I have two of these accounts and I earn 3% interest in each.

  20. lester says 13 February 2013 at 14:54

    How long can my bank clear a money order deposited in your checking account and then come back and tell me the money order is no good. My bank have waited 2 months to tell me a money order I deposited and was cleared by them earlier was not any good. This action has reached havoc on my checking account which I used to conduct my small business transactions. I would spend money to reinvest in my business which turned out not to be legitimate. Do I have any protective rights regarding this issue.Is there some time limit the bank can wait to tell me a money order is no good.

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