Finance Globe

U.S. financial and economic topics from several finance writers.
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The Student's Guide to Banking

Avoid overdraft fees and Non-Sufficient Funds (NSF) charges.
Carefully tracking your balance is essential to good checking account management. One mathematical error or simply forgetting to document all check and debit transactions can lead to costly problems.

A bad check or an automatic payment that you forgot you signed up for can easily cost you several times more than the typical $30 overdraft or Non-Sufficient Funds (NSF) charge. Many merchants or service providers will try to run the payment again if the funds are not available the first (or second, or third) time.

That means you can be charged a fee for each time the payment is submitted to the financial institution - by both the payee and your bank. And when those costly fees drain your checking account, it can set you up for more bad payments and more fees. This can become a very expensive mistake!

Some financial institutions offer a one-time overdraft forgiveness for student accounts. They understand that students are relatively new to managing their finances and that mistakes can happen. This is a great feature, but avoid intentionally using it. You just may need it for real someday.

Keep track of all transactions and make sure you have the funds to cover new transactions.
Balancing a checkbook is a little more complicated now than it was when you could only pay with a paper check and all your transaction were recorded for you on the duplicate.

These days, you can access funds in your checking account through electronic transfer, debit card, paper check, electronic check, ATM withdrawals, and automatic payments. More choices in how to pay means more convenience, but it also leaves more room to forget something and risk over-drawing your account.

Don't write checks or use your debit card unless your account has the funds to cover the transaction. You may be surprised at how quickly transactions are processed - and overdraft fees are assessed - if you think you can write a check today because tomorrow is payday.

Know your financial institution's policy on how long it takes for deposits to be available for withdrawal. Paychecks are usually credited to your account the same day, but some deposits may not be credited immediately. Out-of-state checks may take as long as ten days to post to your account - something to keep in mind if you receive regular checks from your folks.

Don't count on an ATM for an accurate checking account balance - all your transactions may not be accounted for. A better way to check if you haven't manually balanced your account is to log-in to your bank account details online.

Balance your checkbook carefully with each payment. Or keep check duplicates and debit card receipts and check your balance online, making sure they have all recent transactions accounted for.

Don't forget about automatic payments. They're convenient because the service provider takes payment from your checking account each month without you having to do anything, but that's exactly why it's so easy to forget about them.

Tricks to Avoid Overdrafts
Of course, the best way to avoid overdrafts is to carefully manage your checking account. But, life happens. Everybody makes a mistake sometime. Insure yourself against costly overdraft charges, and try one of these damage-control tactics:

Keep extra in checking.
The simplest way is to keep a cushion in your checking account of maybe an extra $100 or so. The only problem with this is that many people will consider it as extra spendable cash.

It's actually just like setting your alarm clock half an hour fast - it doesn't help you get up early because you know the clock is fast, so you hit the snooze button and sleep an extra thirty minutes.

If you know you have an extra $100 in your account, will you have the discipline to leave it there as overdraft protection? Or will you come up with a reason to spend it someday?

Link checking and savings accounts.
Even better, talk to your financial institution about having your checking account and savings account linked so that the financial institution automatically transfers funds if your checking account is overdrawn.

You'll completely avoid the merchant's NSF charge, but the financial institution will probably charge a small fee. My credit union charges $3 per overdraft transfer - much better than numerous overdraft and returned payment charges of $30 or more.

This may be the best way so that you keep an accurate balance on your checking account, but don't forget to replace your savings if funds are transferred to your checking account. Of course, this only works if your savings account has the funds to cover the transaction, so keep saving regularly.

Line-of-credit to cover overdrafts.
Another barrier to overdraft and NSF charges is to apply for an open line-of-credit attached to your checking account. If you overdraw your account, the financial institution will automatically take out the funds to cover your transaction, and may charge a small fee similar to the fee for a transfer from a savings account.

The line-of-credit will cost you nothing if you aren't using it. If you do use it, the amount withdrawn becomes a debt that you'll have to pay back, with interest.

The danger here is that applying for too much credit can become a problem for anyone, especially for students on limited income. As long as you pay it back as soon as you have the funds, it will still cost you much less than overdraft fees.

But if you drag out the payments, or even worse - add to the debt by over-spending and intentionally tapping into your line-of-credit - it can become more costly than what you were trying to save. Use common sense, and don't spend more than you can afford to pay back if you go this route.

Sign up for overdraft privileges.
Some financial institutions offer what they call "overdraft privileges". The financial institution will still charge you a one-time over-draft charge, usually about $30, but they can choose to pay the merchant the amount of the check to save you the merchant's fees.

Financial institutions also reserve the right to deny payment, and that's just what they may do if they feel the size of the overdraft payment is too large, or if you habitually overdraw your account.

If they pay it, you'll have to get the account balance out of the negative within 30 days or whatever the institution requires. Also, you may have to pay a fee of about $5 day for every day that your account is in the red.

This service will cost you nothing if you don't overdraw your account. But if you do overdraw, keep in mind that this feature is really just an expensive loan. If you use this service, get your account balance out of the red as soon as possible to avoid extra fees. Overdraft privileges are usually not available on student accounts unless your parents co-sign for you or have their own account with that institution.
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Wednesday, 16 October 2019

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