What Is a Return Check Fee and How Do You Avoid It?
Don't get caught off guard by return check fees. This guide explains what they are, their consequences, and actionable steps to prevent them.
A return check fee is a charge incurred when a check cannot be cleared through the banking system. Financial institutions and other entities impose this penalty to cover administrative costs and risks. Understanding the causes and consequences of these fees is important for financial stability.
Understanding Why Checks Are Returned
Checks are returned for various reasons, most commonly due to insufficient funds (NSF) in the check writer’s account. This occurs when the account balance is too low to cover the check amount. Other common issues include checks drawn on closed or frozen accounts, which prevents funds from being disbursed.
Technical errors can also lead to a check being returned, such as missing signatures, incorrect account numbers, or checks that are post-dated or stale-dated. A check writer might also issue a stop payment order, instructing their bank not to honor a specific check.
Who Charges Return Check Fees
Multiple parties can charge fees when a check is returned. The check writer’s bank typically assesses a non-sufficient funds (NSF) fee or a returned check fee. These bank fees vary, but the average NSF fee is around $34, though some can range from $25 to $40.
The bank of the person depositing the check may also charge a “deposit return item fee.” These fees are generally lower, averaging around $5 to $8. The payee, such as a merchant or landlord, may also impose an additional fee. State laws often permit merchants to charge between $20 and $50, or a percentage of the check amount, for a returned check.
Ramifications of a Returned Check
Beyond immediate financial penalties, a returned check can have broader negative consequences for the check writer. Repeated instances can damage one’s bank relationship, potentially leading to account closure. This closure can then be reported to consumer reporting agencies like ChexSystems.
ChexSystems tracks banking history, and a negative report can make it difficult to open new bank accounts for up to five years. While some financial institutions offer “second-chance” accounts, these often come with higher fees or specific requirements. Intentionally writing a check without sufficient funds can also be considered illegal in many jurisdictions, leading to legal action. The original payment obligation remains, often with added penalties from the payee.
Strategies to Avoid Return Checks
Preventing returned checks begins with diligent financial management. Regularly monitoring your account balance and tracking all transactions, including pending debits and automatic payments, can help ensure sufficient funds are always available. Many banks offer online banking and mobile apps that provide real-time balance updates and allow for setting up low-balance alerts, which can notify you when your account drops below a certain threshold.
Another effective strategy is to link your checking account to a savings account or a line of credit for overdraft protection. This arrangement allows funds to be automatically transferred to cover a shortfall, though a small transfer fee might apply. Maintaining accurate records of checks written and deposits made is also important. When possible, consider using alternative payment methods like electronic transfers, debit card payments, or online bill pay, as these often provide more immediate fund verification and reduce the risk of a returned item.