Living within your means is important for your financial and mental health. So when times are tight, be extra sure you have the funds before writing a bad check. When your check bounces, it costs you more time, money, and energy in the long-run.
What happens if a check bounces?
You’ll have a bounced check when the amount in your checking account is less than the value of the check. If the receiver tries to cash or deposit your check before there’s enough to cover the full amount, the check will bounce due to “non-sufficient funds” (NSF). Bounced checks are also called rubber checks. (Less commonly, a check can bounce even its account has enough to pay for it if the check writer tells the bank to “stop payment” on it.)
When you write a check that bounces, you’ll probably be a bit embarrassed. While it’s not always your fault (maybe an automatic withdrawal happened before an automatic deposit cleared), you’ll still have to deal with the consequences. One of the most immediate drawbacks of a bounced check are the fees that come with it.
Each state decides the fees owed for check payments that are returned for lack of funds. These “recovery costs” generally range from $20 to $40. Most of the time, you’ll pay a flat rate, but a few states base the fee on a percentage of the amount of the check.
Fees for non-sufficient funds are like a bad chicken-or-egg scenario. If you wrote the check and truly don’t have enough money to cover the cost, then with the new fees, you can go into debt over not being able to pay. That makes it even harder to right the wrong and pay the original amount you owed.
Impact on your credit report
While your primary credit report will likely remain unaffected by your bounced check, some “alternative” checking account reporting companies, like ChexSystems or Telecheck, might ding you.
As a result, banks can deny your request to open a checking account if you have any red flags from these companies. In this case, be sure to ask for the report to make sure there aren’t any errors. You can also ask for a free report if you receive an “adverse action” notice, which the bank has to provide you if they turn you down.
In the case of a loan payment, a bounced check is a bigger deal and your main credit score could be affected. Non-sufficient funds mean that the payment was technically never completed. Unless you tried to pay early, that likely means you either missed a monthly payment or were late. This unpaid balance could get you in trouble with a collection agency, which might report you to the credit bureaus. This is a fast track to lower credit scores.
Late payments will stay on your record for seven years, which can affect other loan eligibility and even insurance rates. Your top priority should be to get back on track with your original payment schedule.
Potential legal action against you
In addition to your credit score, debt collectors could mean bad news legally. Just like the recovery fees, each state determines the legal action you may face. You could be dealing with civil or criminal charges.
With civil charges, you’re in store for even more fees. (Remember that horrible cycle of being charged for having no money? It gets worse.) You might be able to avoid these charges if you can plead your case to the recipient before they file a lawsuit. If you don’t reach them in time or they aren’t sympathetic to your situation, you’ll probably have to pay legal fees for yourself and them, as well as additional penalties.
In a criminal case, even higher fees might be in your future, along with a mark on your permanent record. In extreme cases, you might even go to jail. If someone is threatening you with criminal charges, be sure to seek legal counsel before things escalate.
Steps to take if you bounce a check
It will be an uphill battle, but you need to take fast action. Contact your bank and the payee (the person you gave the check to) as soon as you realize the check will bounce or has already. Make sure you’re all on the same page—that you’re going to make things right as quickly as possible.
Deposit funds into your account as soon as you’re able. Decide if you can pull from a different account or even borrow from a loved one. Speed is key here. Note: an electronic transfer or check deposit might be immediate, or it could take days to hit your account. To be extra safe, bring cash in person at your bank branch.
Next, figure out how much you’re going to owe in fees. Work to bring your account current to avoid any additional fees.
While you’re at it, prevent getting in this situation again by looking into overdraft protection. With this protection, your bank covers the amount of your bad check and you pay the fees to the bank, rather than suffering any additional processes or penalties. The overdraft fees might even cost you less than bounced check fees without protection, which you would owe to retailers and your bank.
How to avoid having a bounced check
With technology speeding up the exchange of funds, you can no longer write a check and cross your fingers that the recipient will wait a few days to get to the bank. However, if you realize after writing the check that you’re not in the clear, consider reaching out to the person or business and asking for a bit of a grace period. They may be willing to wait to process the check until you can refill your account with funds.
If you have multiple accounts with a bank, you might also be able to arrange for them to take money from your savings account in the case of insufficient funds in your checking account.
But the best line of defense is good personal finance habits from the get-go.
Create a budget
Plan, then plan some more. Map out recurring expenses and income. Leave a cushion for unexpected costs. (You might not know the amounts and causes, but you can bet on something unforeseen popping up. Pencil that in.) Your budget is a useful framework to keep you in line with your priorities and means.
Build up your savings
In your budget, consider how you can make room for savings. Every little bit helps and it adds up over time. Focus on building up your emergency fund and rainy day fund. Your savings will help you avoid a crisis that sets you up for writing a bad check. It’s so reassuring to have money to fall back on when things go awry.
Balance your checkbook
Keep your checkbook in check by setting money dates with yourself, and potentially your partner. Balancing your checkbook is especially important if you use a debit card or share an account with someone because your account balance may be different from when you last looked. You need to have a handle on what’s going out and what’s coming in to see if your budget and savings are on track.
Plan and adapt
So much in life is unexpected, but a bounced check doesn’t need to be one of them. Do everything you can to avoid non-sufficient funds, but if a bounced check leaves your checkbook, be proactive in handling the aftermath as quickly as possible.