Banks do not have to honor checks written for amounts in excess of your account balance. In many states, you violate the law when you knowingly or accidentally write a check without sufficient funds to cover it. However, in many instances, banks do honor checks that cause your account to go into the negative, but policies relating to overdraft procedures vary greatly from bank to bank.
Accounts With Overdraft Protection
Most banks offer some type of overdraft protection, which involves linking another account – such as a savings or credit card – to your checking account to cover checks that would otherwise bounce. Overdraft protection only works if you have enough money in your linked account to cover the charge.
Additionally, although overdraft protection enables you to avoid non-sufficient funds fees, you do incur an overdraft protection transfer fee. You must therefore have enough money in your linked account to cover both the check being presented and the fee. If you set up overdraft protection and have covering funds, the bank won't reject your checks and other charges on your checking account.
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Discretion of the Bank Manager
Generally, banks refuse to pay checks that exceed your account balance, but most banks allow branch managers and key employees to use discretion when it comes to handling these items. Banks often honor checks written by commercial customers with substantial relationships because rejecting the check could jeopardize a profitable relationship. Bank employees also sometimes make exceptions for long time account holders who keep substantial balances.
If it makes better business sense for a bank to honor a check, then it will. However, if you keep minimal balances and have a limited relationship with the bank, do not expect the bank to honor your checks when you do not have covering funds.
Understanding Overdraft Fees
When your bank account goes into the negative, your bank can charge you an overdraft fee even though it caused the account to go negative by honoring an item that there were insufficient funds to cover. You must make a deposit to bring your account back into the positive.
If you fail to do so, right of offset laws in most states allow your bank to debit other accounts that you have to cover the debt. If you have no other accounts and do not make a deposit, then the bank can report the debt to the credit reporting agencies, and the debt can remain on your credit file for seven years.
The Right to Opt-Out
You have the right to opt-in or opt-out of your bank's standard overdraft procedures. This means you can give your bank the discretion to make decisions on paying overdraft items, but if you do so, then your bank can assess an overdraft fee even if it chooses not to honor an item. If you opt-out your bank cannot approve items that would cause your account to go into the negative, but neither can it charge you any overdraft fees. However, these rules only apply to one-time debit card transactions and not checks.
The Consumer Financial Protection Bureau also warns that if you choose to opt-out, the bank can instead charge you a non-sufficient funds fee. The organization points out that this fee is often equal to the amount of an overdraft fee.
Preventing an Overdraft
Capital One suggesting take a few steps to prevent any future overdrafts from happening. They recommend setting up alerts that will be triggered once your account balance reaches a certain amount, checking your account balance regularly and building a buffer of around $100 so that your account never reaches zero.