In times of PayPal, Apple Pay, online banking and so on, checks may seem a bit antiquated – but they definitely still exist. In fact, they accounted for 14.5 billion consumer payment transactions in 2018. The problem is, banks are only obligated to cash checks when the check writer has enough money in his account to cover the check’s value. So how do you proceed if, for example, you accidentally bounce a check or you’re the recipient of a check that bounces?
What’s a Bounced Check Anyway?
A check can be "bad" for all sorts of reasons – it has not been filled out properly, the wrong person signs it, or the check is a fake. A "bounced" check is a specific type of bad check that’s written on an account that doesn't have enough funds to cover the amount of the check.
For instance, if you wrote a check for a new sofa that cost $800, but you only had $700 in your checking account, then you’re writing a check that will bounce. Most times, this happens by accident. Maybe an automatic payment was deducted from your account a day earlier than you expected, or maybe a check you deposited hasn’t cleared yet. Either way, there are not enough funds in your account to cover the check.
The "bouncing" does not happen straight away. When the furniture store deposits the check, its bank will deliver the check to your bank for payment. This may take a couple of days. Assuming you did not hastily put an extra $100 into your account to cover the shortfall, then your bank will "bounce" the check, meaning they will send it back to the furniture store’s bank and refuse to pay it.
Bank Designation “NSF”
At this point, your bank will mark the check with the letters "NSF" that stands for "Non-sufficient Funds." The designation “NSF” can turn your bounced check into an expensive mistake. The fee for writing a bounced check comes in around $25 to $35 depending on the bank – and that’s per check, so the penalties can soon add up if you wrote several bad checks that day.
The person you wrote the check to may also be charged an NSF fee, depending on the state where you wrote the check. Obviously, the furniture store wants payment for the sofa. They almost certainly will pass their NSF fee along to you when asking you for payment for a second time.
Legal and Credit Trouble
A bounced check does not directly affect your credit score – but that’s not the end of the story. If the check was for a mortgage payment, for instance, then your credit could get involved if the bounced check means you were late with the payment. Skipped and late payments will definitely lower your credit score.
Also, banks use something called the Chexsystems to track how consumers use their bank accounts. Bounce too many checks, and you may struggle to find a bank that will let you open a checking account. Your own bank may close your existing account, too.
How to Avoid Bounced Checks
If you realize that a check is about to bounce, you may be able to prevent it by getting money into your account immediately. The best way to do this is by depositing cash at a branch. Longer term, you can avoid NSF fees with careful budgeting and management. Here are some tips:
- Keep a cushion in your checking account at all times so you do not accidentally write a bounced check or overdraw your account.
- Carefully monitor your bank statements so you know exactly when automated payments are coming out of your account, which is a common cause of insufficient funds.
- Opt for overdraft protection. This is a banking product that guarantees to clear your check even if your account balance falls below zero. There may be fees and interest associated with overdraft protection, so be sure to read the fine print.
- Pay with a debit card. If you don’t trust yourself to keep on top of your checking account, pay with a debit card. You’ll know straight away if payment is accepted or declined before the transaction goes anywhere near the bank.
- Federal Reserve Bank of Atlanta: .Consumers Use of Personal Checks
- Vericheck: State Allowed NSF Fees
- Dough Roller: Does Bouncing a Check Hurt Your Credit Score?
- Value Penguin: Bank Overdraft Fees
- ChexSystems: Home Page
- Federal Deposit Insurance Corporation. "Check Clearing for the 21st Century Act (Check 21)." Accessed March 31, 2020.
- San Francisco Federal Credit Union. "Overdraft." Accessed March 31, 2020.
- BBVA. "About Overdraft Fees." Accessed March 31, 2020.
- VeriCheck. "State Allowed NSF Fees." Accessed March 31, 2020.
- Connecticut General Assembly. "Bounced Checks - Bank Service Fees." Accessed March 31, 2020.
- Consumer Financial Protection Bureau. "When Can I Be Denied a Checking Account Based on My Past Banking History?" Accessed March 31, 2020.
- Federal Deposit Insurance Corporation (FDIC). "Have You Bounced Yourself Out of a Checking Account?" Accessed March 31, 2020.
- Consumer Financial Protection Bureau. "I Bounced a Check. Will This Show Up on My Credit Report?" Accessed March 31, 2020.
- State of California Department of Justice. "Bad Checks." Accessed March 31, 2020.
- FindLaw. "California Code, Civil Code - CIV § 1719." Accessed March 31, 2020.
- Washington State Legislature. "Unlawful Issuance of Checks or Drafts." Accessed March 31, 2020.
- Pinal County Attorney's Office. "Check Enforcement Frequently Asked Questions," Page 1. Accessed March 31, 2020.
- American Civil Liberties Union. "A Pound of Flesh," Pages 4-7. Accessed March 31, 2020.
- Consumer Financial Protection Bureau. "My Bank/Credit Union Offered to Link My Checking Account to a Savings Account, a Line of Credit, or a Credit Card to Cover Overdrafts. How Does This Work?" Accessed March 31, 2020.
Jayne Thompson earned an LLB in Law and Business Administration from the University of Birmingham and an LLM in International Law from the University of East London. She practiced in various “big law” firms before launching a career as a commercial writer. Her work has appeared on numerous financial blogs including Wealth Soup and Synchrony. Find her at www.whiterosecopywriting.com.