The most important piece of financial advice I can give to average Americans is never: ever write a check. Using checks is the fastest way to lose all your money; destroy your credit rating, and totally screw up your finances in today’s banking system.
This conclusion is based upon my personal experience; and a lot of study of the banking and electronic payment systems that exist in today’s world. The nature of the modern banking system makes checks weapons of financial mass destruction; that can wipe out all of your wealth and ruin your credit score, in the blink of an eye.
What a Check Really Is
A check can wreck your finances; because it is simply written authorization for somebody to make a withdrawal from your bank account. Years ago this created few problems because it usually took the recipient several business days; or weeks, to cash the check.
Today the FDIC allows a check recipient to make an instant electronic withdrawal using an image of the check. If you have been to Walmart in recent years; you may have noticed that the retail giant’s cash registers scan checks, which are handed back to the customer.
Walmart takes this step to instantly verify payment and avoid getting stuck with bad checks. It also reduces paperwork and labor costs because the store no longer needs to pay an employee to sort checks, endorse them and take them to the bank.
Why Accounts Get Overdrawn
Most big companies employ the same process. If you mail your MasterCard bill to Capital One on Friday; there’s a good chance it will be cashed on Monday. Your bills are sent to a sweep account at a bank where a clerk scans all the checks. As soon as the scanning is complete the funds are withdrawn electronically.
This means that you no longer have several days for checks to get covered. If you have $500 in your checking account on the eighth and write and mail several checks totaling $1,000; in anticipation that you will be paid by direct deposit on the 13th, your account will probably get overdrawn.
Banks like this system because they can hit you with a $30 or $50 overdraft fee, every time a check bounces. If a check bounces several times the bank makes several hundred bucks. Your account gets emptied; and your credit score can be wrecked, if the overdraft is reported to credit bureaus.
Why you should Burn or Shred Your Checkbook
That means the paper record you might be keeping of your checking transactions is worthless. The second piece of advice I would give to average people; is stop trying to balance your checkbook.
Take the record of checks that comes in the back of your checkbook and throw it out. Balancing your check account by pen and paper is a waste of time; because you are using horse and buggy technology, to try and keep track of something that moves at the speed of light.
The biggest danger here is that you get a false impression of the amount of money you have available. You might think you have enough money to cover all your bills in the account when you do not.
One group that gets badly hurt by this is senior citizens, like my mom. They think they can cover all their bills by sending in checks in anticipation of payment, because they believe it will be several days before the instruments are cashed. Older people operate this way because it has worked for them for decades; they fail to recognize that the system has changed completely.
A big reason why senior citizens get hurt by this is the way that Social Security is paid. The Social Security payment dates can vary by as much of a week; which makes it hard for them to judge when to mail checks.
How to Avoid Overdrafts
Fortunately it is easier than ever to avoid overdrafts in today’s world; if you understand how the modern banking system works. Here are some steps you should be taking to avoid overdraft fees:
- Never write a check; or send out a payment, if the money is not in the account. Wait until it is there to make the payment.
- Only write checks when you have no other choice. Always ask if there is an alternative to a check, and use it even if it costs extra. My phone company charges me a $3 fee when I pay the bill by credit card. I still pay by plastic; because $3 is a bargain, compared to a $30 overdraft fee from a bank.
- Never write a check at a store. Use cash; payment apps like Apple Pay or Walmart Pay, or credit or debit cards for brick and mortar retail transactions.
- Stop carrying your checkbook or checks with you. That prevents you from writing too additional checks. It also reduces the possibility of identity theft; because you are not carrying pieces of paper with your banking information on them around with you.
- If somebody; like a landlord, insists on check payment seriously consider using a money order instead. That way you will know the payment is covered, and it will not affect your checking account.
- Pay as many bills as possible by credit or debit card, or your bank’s electronic bill-pay. Almost all utilities, credit card companies, finance companies, insurance companies, local governments and even the IRS accept some form of electronic payment. By using this method you can make sure the creditor gets the payment. When you mail a check there’s no guarantee if; or when, it will actually arrive. When you pay electronically the money is in their account, often instantly.
- Almost all banks these days offer some sort of electronic bill pay free with checking accounts. Simply wait until the money is in your account then use the electronic bill pay to send out the payments.
- If you write a large check wait until it clears; to pay other bills, even if some of them are past due. Contrary to popular belief you can delay many payments. Most utilities; including cable phone and electric companies, will ignore payments that are a few days late. Only credit card companies seriously penalize you for late payment. If necessary you can always pay the minimum amount.
- Don’t waste time balancing your checkbook. The bank’s computers balance the account automatically for free; and you can check it anytime you want online. The online balance is more accurate; and more importantly, it will show you how much money you actually have.
- Avoid automatic bill pay like the plague. Even though automatic bill pay is easy; it can create problems, because the recipient decides when payment is made. Use your bank’s bill pay or credit or debit cards instead.
- Never use the overdraft protection offered by banks. If you have this on your accounts shut it down; because under such systems the funds in your savings are used to cover overdrafts. When you have overdraft protection; one bouncing check can clean out both your savings and checking accounts, leaving you flat broke.
- Use a credit card to make all retail payments, both online and brick and mortar. Then pay the balance off at the end of the month. That way any extra spending will not clean out your checking account, and lead to overdrafts. This method can greatly improve your credit score by providing a record of responsible activity. You can also get cash back or a rewards card with many credit cards.
- Never write checks for cash because it is waste of both time and money. Instead use your debit card to get cash from an ATM; at stores when you make purchases, or directly from a bank teller.
Checks need to be avoided; because they are an obsolete technology that can get you into deep trouble fast. Burning or shredding your checkbook might be one of the smartest moves you can make in today’s world.