The Basics of Checking Accounts

I would have to say that many of us have had our frustrations with banks as of late.   Sometimes it is just an ongoing aggravation of their arrogance and greed.   Face it; banks won’t exist if they do not have our money.  The power and greatness is all based on what we give them and the responsibility we give them in handling it.  In return, we are often bullied by their practices while watching them carelessly make risky choices, choices that they themselves would not condone others to make.

Another irritating fact is that banks are necessary for modern day living, making them a necessary evil that most people have no clue of their relationship with.  When we look at many bank lending practices over the last few years they have been anything but responsible. As banks are leveling out from merging and being bailed out we can only hope that in the future that they will be more careful with our money. And yes again, I stress our money.

There are many people, whose knowledge of banking is based on putting a check in the bank every payday for ease of access, basically making the bank a check cashing service.  Shame on you if this is the case.  The bank is making money off of you, in one form or another.  It might be fees, or they may be using your money to loan out.  It time you should let the banking industry work a little for you.

Now I want to clear things up I am not talking about getting rich off the bank but in today’s world we do need to know how to use the tools provided to us and banks are a tool.  So many of us are just trying today to stay ahead or just say afloat. Well, you start doing this by budgeting, keeping realistic expectations, developing healthy body and soul, living by a set of values, and becoming educated. Banking can help you meet part of these goals.   I will be doing a series of blogs that will be dealing with information and techniques that will help one survive in the community we live, starting with a basic lesson on our relationship with our local banks and how to make checking accounts work.

You are a consumer, businessperson, college student, household planner and basically a financial participant in this economy and need to understand how to use a bank.   I am not talking how to manipulate money to get rich.  If you have that ability and opportunity, great, take advantage of it.  The fact is many people in the United States just want to keep their boat afloat right now.  The first question one might ask is why do I need a banking account?  I can purchase what I need to live without a banking account.

The benefits of having a bank account far out-ways the negatives of having one.  Here is a short list of the benefits one gains with bank accounts.

• You have a chance to build your credit history.  And it is one of the first things creditors look at.  If you cannot manage a bank account why would they think you could manage a loan?
• One has a secure and insured place to put his/her money
• No charges for cashing checks
• Direct deposit
• Often one has debit/check cards available
• Often have access to your account online
• Frequently one can have automotive bill pay
• Frequently available is budgeting and retirement tools (Make use of these, have a banker explain them to you if you are not familiar with them.)
• Access to checks
• Do not have to carry cash on you.
• Some accounts are interest or award baring

So in essence a banking account is a tool for helping you get credit and manage your money. The answer is yes and no.  In the end banking accounts, unlike other money accounts, are for paying needed expenses.  They are not there to make money.  Although obviously one can make money with specialized banking accounts, it is not their primary purpose and one can usually do much better with investment accounts with their extra money.  So there is a balancing job of how much money you want in a checking account and what type of account you will want to use for checking depending on the balancing strategy you use.

There are a wide variety of checking accounts available to one nowadays but they basically boil down to free checking, interest checking, and reward checking.

Free Checking

This type of checking is made available to customers as a value savings product.  Usually to open one of these accounts all one needs to do is make a small deposit, and qualify for the checking account.   These accounts usually have no annual fee.  In my opinion there should be none, if it a true free checking.  Along with this there are no minimum balance requirements.

The advantages of these accounts are:

• No Low Balance Fees
• Free ATM and/or debit card
• No charge for ACH and direct deposits transactions
• Free online access to your account
• Unlimited monthly checkwriting
• No minimum checkwriting amount

Other advantages one might find are:

• On line bill pay
• Overdraft Protection (Do not get overconfident with this. It is an emergency protection.  Most of the time the fee associated with this is fairly high, and will add up fast if a domino effect of overdrafts happens.  Also remember if your account ever becomes in the negative you only have a certain amount of time to get it into the positive before the bank will close the account.  DO NOT LET THIS HAPPEN.  Also, they can close it if the balance becomes too far in the negative.  In other words practice proper balancing of the account.  Later in this article I will discuss the possible nightmare of trying to get this resolved if an account is closed by a bank.

The drawbacks of these accounts are:

• Typically does not pay interest (Though I read that one can link these accounts to high yield accounts to earn interest.)

These accounts are good values for those that are not going to have a large cushion in their account.  If this is the case I stress getting an account that will qualify for overdraft protection, and, as we all should, keep a close balance on the check book.  If you can, link it to a saving account for overdraft protection.  All though one is not earning interest with this account, you are still showing a credit history by using it and keeping it in good standing.  As you build this credit history, get a credit card with a Bank not a banc.  Preferably the one you are banking with.  Even if it is an introductory card, do it.  Before doing that open a saving account and put some into it every month.

Also note that there is a lot of talk in the industry right now about moving away from free checking and going with packaged checking programs, where one will be given perhaps so many checks to use for a given price per a month, much like a business checking account.  If you use more than the allotted there will be an extra fee.  How it will actually work out is not clear.  What is clear is that free checking may become a dinosaur in the near future.  If you can get yourself into a free checking account now do so if it fit your needs.  It may not be an option much longer.  Many younger folks may not realize free checking is a relatively new advent in checking and with the new limitations on credit cards banks are now looking for other ways to make money.

Interest Checking

Interest Checking are checking accounts that offer many convenient checking features with interest on the money in the account.  This is a nice option for those that have a decent cushion in their banking account and are not reliant on overdraft protection for mistakes.  Be careful not to have too big of a cushion in these accounts.  Even though you earn interest, it is not great and you would be much better off investing your extra money.  I always thought of these accounts as staying even with inflation accounts.  They are not there to make you money, just to keep your money from losing value while sitting there.   As with all accounts, I recommend some sort of savings and the use of a bank card not a banc card.

The advantages of these accounts are:

• Unlimited check writing
• Use a debit/check card
• ACH Transfers
• Earn a competitive return on your cash.

Frequent drawbacks of these accounts:

• Limited number of transfers in an account a month
• Minimum balance required
• Bounce Check Fees (One might also look into linking one of these accounts to a Saving Account to give it additional cushion.  You can also look at overdraft on these accounts, but these accounts require a minimum balance.  If you do not think you can keep it, there is no use in using one of these accounts; because there will be a fee involved when you drop below that minimum balance even if your account is in the positive.  The interest you are getting will not mean a thing then.)

Reward Checking

Reward checking allows you to earn a good amount of money on what you have in your bank account.  Sometimes better than a long term CD while having ease of access to the money.  The catch is that everyone can automatically have a Reward Checking account.  You have to qualify for one.  Frequently these accounts are for businesses or people moving large amount of money. 

Some of the qualifications can be:

• Must have direct deposit
• Receive online statements vs mailed statements
• Must use you debit card a minimum times per month.
• Account must be opened in person
• One must log into their account at least once per month
• Each bank can add its own set of criteria to the list but the list must be met to have the account
• Also one often only earns interest on a certain amount of a deposit, for instance the first 20,000 dollars.

Federal Regulation D

There are other variations of these accounts but these are the three basics.  Now that you know them let turn our attention to Federal Regulation D – a.k.a. Federal Limit on Electronic Transfer.  You as a banker should find this an important regulation and be aware of it.  This regulation limits the number of electronic transfers on saving and money market accounts to six outgoing transfers a month.  Why did I bring this in when we are talking about checking accounts?  More and more people are linking accounts now days.  Especially saving accounts and banking accounts. On rare occasions this could become important.

What qualifies as an electronic transfer?

• Online, overdraft, telephone and preauthorized transfers
• Checks clearing each month from any savings or any money market account.
• Faxes, ACH Debits, money market checks.

What transfers are not affected?

• Any transactions that are in person or by mail are not affected.

Also note that your individual bank account may state a limit less than the law allows.  Often this is done to insure that you do not go over the limit, and keep you safe.  Basically one needs to keep this regulation in mind when they are making transfers from saving accounts to other accounts. In many instances it is not for say a physical limit, but one that might let you exceed the six limit only to pay the price for doing so later.  You could find your account suspended, closed or tacked with fees.  So it is up to you to be aware of this limit and not go over it.

Check 21 Act

Next we are going to discuss the Check 21 Act.  This is another one of those acts that all bankers should be aware of.  This is the act that allows for the manufacturing of digital checks.  Most of us probably have already experienced how these checks work, but how does it affect you?

Check 21 Act Effects you by:

• First you will not be able to get your original paper checks back because banks are not keeping them.  You may be able to pay to have them kept for further referencing, but they will not automatically do it for you.
• Checks, on general, will clear faster.  Oddly enough, banks do not have to clear deposits at the same speed.  So make sure your money has cleared before writing a check.
• If you need a copy of a check you can request one for a fee, a copy that is, not the check.  They do not have the check.  You may also be able to see an image of it on line as well
• In the case where there was an error.  Where a check was paid twice, you can have it reaccredited within 10 days receiving a refund up to 2,500 dollars.

EFT Act:

The last act we will mention is the EFT act.  The EFT Act – the Electronic Funds Transfer Act, defines the rights and responsibilities of those who participate in EFTs.  What is included as an EFT?  These are ATMs and point of sale transactions using your debit or check card, telephone and preauthorized transfers.

How does the EFT act affect you?  (This one very important)

• What is important here is what happens when there is an error.  You have no more than 60 days from the date of the statement to report an error either verbally or in writing
• Financial institutions are given 45 days to investigate the error and resolve it. Errors that involve new accounts, POS and foreign transaction can take up to 90 days.
• Where an investigation takes longer than 10 days the financial institution must re-credit the amount in question while the remainder of the investigation is being resolved.  (If this happens do not spend this until the investigation is resolved.)
• The credit institution must report its findings to you (and make its credit final) or in the case where there is no error deduct the amount (if already been credited) and explain to you in writing their findings.
• This also covers the loss and theft of an ATM card.  If notifying an institution within 2 business days of it being lost you are limited to a maximum of 50 dollars of liability.  If not the liability can be raised up to 500 dollars, and if you do not notify them within 60 days the liability could be unlimited.

Just a note for credit card loss, the liability is 50 dollars under the Fair Credit Billing Act.  If the loss involves the credit card number not the card itself you are not liable for any unauthorized use.

A debit/check card often has addition protection that the bank will offer.  When getting a debit/check card make sure you know how it is protected and if the bank offers additional protection on them outside of the law, basically some type of card insurance.

Chexsystem:

Last, let’s discuss Chexsystems.  This is basically who the banks report our banking habits to.  For the most part it is a fairly good system but you do NOT want to be on the wrong side of this system, and it can happen because you did something and deserved it or because the banks were lazy in their coding.  The definitions of “Fraud”, “NSF”, and “Abuse” are vague in this system allowing the bank to make their interpretation of how they want to code it.  It appears from my research that more and more banks are using the “Fraud “ or “Suspected Fraud” codes to mean whatever the bank wants it to mean at the time.  Here are some examples that I was able to find but not verify.

• “Elderly person falls victim to a pigeon drop scheme and deposits a phony money order in her account for $5,000. This individual is 84 and has maintained the account in good standing for over 25 years without a single overdraft. Her account is closed and she is reported to Chexsystems for “fraud”, causing her monthly Social Security payment to be returned. What was aggravating is that she also had an investment account at the bank with over $11,000 in it. (Wells Fargo)”
• “Small auto dealer sells a car, depositing a cashier’s check for $6500. At the time of the deposit, he asks for $1000 back in cash. The dealer has owned the business for 22 years, and keeps a large average balance in the account. Because the cashier’s check was a forgery, he is arrested on the spot, the account is closed and reported to Chex as fraud. (Chase Bank – formerly Bank One)”
• “An employment dispute caused the account holder’s employer to issue a stop payment on a payroll check, resulting in over 400 of NSF charges. The account is closed and reported to Chex as fraud. (Compass Bank”

In all these cases the people were reported later as being victims themselves, but had long ongoing battle to get Chexsystems to clear the names.  The source I read said they were still trying to clear their names but no accurate dating was given to be able verify a timeline.

The bottom line is be aware of how important this Chexsytem rating is.  Once it is rated bad you will not get a bank account until it is cleared up, and getting it cleared up is very difficult.   This will not only affect your banking but your entire credit history.

Information on the Chexsytem was from Chexsystem Help Forum.  No information provided is intended to be given as professional legal counsel, but as helpful advice when dealing with personal banking.  If one has potential legal banking issue, seek professional advice, and all advice here should be taken as a beginning guideline to understanding a banking relationship.  Also, not that banking laws change and it is your responsibility to keep up with them.  This is part of the education factor of keeping your head above water and not being caught by surprise.  May this basic advice be helpful to you and always consult with your bank for the most update laws and help.  Use them for they use our money.