Hot Checks: Lesson Learned…The Hard Way

In discussion with FB over at Fabulously Broke in the City, I realized there’s a story I haven’t told you guys about my idiotic financial days. It’s a story I see repeated many times with people new to finance, and it really comes down to not having the financial education to know any better.

Hot Checks

Just to make sure we’re all on the same page, hot checks refer to checks written and then returned for insufficient funds, or those that are paid by the bank, but they charge you a fee for it. In reality, anytime you write a check with which there are not funds to cover it, it’s a hot check. So, all you floaters out there, technically, you’re writing hot checks, you just haven’t got caught yet.

Anyway, when I got my first bank account I didn’t have a very good banker. Either that, or she just didn’t care. She opened my account with very little talking, then handed me my stuff and told me I’d get my checks within 7-10 business days. No other explanations on fees or anything. I was expected to read the disclosures and that was that.

7-10 Business Days Later

I get home from work one day to find that I had my checks. Excellent! Yeah, not so much.

Somewhere in my head I got the idea that as long as I had checks, I had money to spend. So, I began writing check after check. Anywhere that took a check, I was writing one. The trouble was, I wasn’t keeping a register or any kind of record of spending. I also wasn’t checking my account for balances because I just didn’t know that I was supposed to.

Imagine my surprise when I go in two weeks later to deposit my payroll check and I get my balance as $350 less what I had deposited. Confused, I asked the teller what was going on. She explained that I had overdrawn my account and whenever I make a deposit, the bank automatically takes funds owed to them out. No one had ever told me this is how it worked, so naturally I was upset. The teller sat me down with the lady who helped me open my account. She explained that I could overdraw my account by writing checks. If I did that, I’d be charged a fee and the funds would come out of my next deposit.

I just didn’t understand. See, the problem was that I still believed I had money. After all, I still had checks. And yes, I was pretty financially ignorant before I got into banking. Some of you may be thinking I’m a total moron, but at this point, I really just didn’t know. I had no clue!

But, back to my story. I left the bank feeling confused and a little irritated with them. I felt like they should have done a better job protecting my money as, in my eyes, this was somehow their fault. I still had money! So, I went home and pulled out the statements. I sat down and looked them over, trying to figure out where the bank made the error so I could go back and demand my $350 back. As I looked over the statement, my eyes went cross-eyed. I literally had no idea what I was looking at.

I went back to my bank and asked them to explain the statement to me. The lady who opened my account said they would be happy to help me balance my statement and register, but that it was $25 an hour with a one hour minimum. Not keen to give them more money, I said forget it and walked out. I continued on my way, writing checks as I needed things. Two weeks later, when I made my deposit, they took $500 out of my check. I was quite beside myself with anger and demanded to speak to the branch manager.

So, we go in and sit down and the manager very calmly asks what’s wrong. I explain that they’ve taken $500 of my money and that I want it back. They took $350 last time, but I was not going to stand for them taking $500. She looked over my account, printed out a statement, and then sat there with me, going over everything line by line. She pointed out each check, then asked if I had written the checks. I said that I had. By the end she tallied up my checks written and then what I had deposited. I had spent $850 more for the month than I had brought in.

I was still confused. I mean, I understood her math and all, but I just couldn’t get around this idea that if I had checks I still had cash. Seeing my confused expression the manager asked what was unclear. I blurted out that I still had checks. She didn’t understand what I meant, so I told her that I was under the impression that if I had checks still in my checkbook, I had cash. Man, she must have thought I was so stupid! But, in reality, I hadn’t been financially educated and they didn’t exactly offer up a lot of information, either.

The manager explained that checks were simply a promissory note, not cash. Just because I had some left over, didn’t mean that I had the money in my account to cover them. She explained the importance of having a check register and writing down what I’ve spent. She spent 10 minutes walking me through how to balance my checkbook (no fee!) and explaining the ins and outs of using checks. By the time I left, I felt much more confident in my understanding of checks.

Need a Fresh Start

Unfortunately, I ended having a several more checks come through after our discussion – all written prior to the discussion. So, when it overdrew my account, I knew it was going to eat most of my check…I think the total that time came to about $425. I decided I needed a fresh start. So, instead of depositing the money, I went to another bank and opened a new account. One day, I get a letter from the old bank informing me that I now owe them $560 and if I didn’t pay soon they would send it over to a collection agency. I didn’t pay, so to collections it went, and there it stayed until a few years ago when I finally got it all paid off.

Fortunately, the experience has taught me a lot about writing checks and what it actually means to hand someone that piece of paper. Unfortunately, it cost me $1400+ to learn it. So, for the ones new to finance, having checks left over in your book DOES NOT mean you have money to spend. A check is your promise to pay someone the agreed upon amount, nothing more. It is not indicative of the amount of money you have, by any means.

12 thoughts on “Hot Checks: Lesson Learned…The Hard Way”

  1. I did a similar thing, but with credit cards. A check is much more obvious to an 18 year old not to abuse than a credit card. Credit cards feel like money is coming out of a black hole into your pocket.

  2. Wow. Thanks for writing that, it made me realize that what we all take for granted now (cheques, credit cards, lines of credit) are not necessarily understood by everyone.

    I think I agree with prozacula, that credit cards feel like money coming out of a black hole, and you just pay a fraction each month for what you bought. WHAT A DEAL! :)


    Thanks Kristy!

  3. I hate checks. I worked in billing for years. The opportunity for errors with checks are too high. You can bounce them, you can forget to sign them, they get lost in the mail, a billing agent can type the wrong info into the computer when paying a bill, you can forgot to add one to your register. Nothing good comes from writing a check.

    Online banking and auto pay are the way to go. Even when I made $22K a year, I could still do auto pay.

  4. We were all financially ignorant at some point in the past. I was just remembering how in college, I had no earthly idea whatsoever what the tuition and fees bill meant and how financial aid, grants, loans, etc. applied to those, what a loan even was (I had the basic idea but just signed on the dotted line where people told me to sign – thankfully, they were not large loans and I later also didn’t understand the $50 payment tickets and sent in several hundreds at a time instead till those suckers were paid very quickly.)

    I understood bank accounts pretty well because I only had savings accounts and they’re hard to misunderstand, but I was given a $2,500 USAA credit card upon graduating college (USAA just offered it to me) and believe it or not, as an intelligent 22-year-old person, I had no real understanding of what a credit card even was. At first I didn’t even use it, I was so confused by it. I didn’t know there was such thing as borrowing money, I think. I also thought that there was no such thing as not paying something when it was due – I must have believed people went to prison immediately or something like that if they missed any payment. Later I understood how credit cards worked just enough to royally screw up that card, and another they graciously gave me after that, and only years later did they take a chance on me again. This time I understand it all to well and they will not be sorry they gave me a third chance. Building up good credit now that I understand it on an expert level is one of my major goals. Sometimes years are needed to truly “get” finances, even when we’re intelligent and otherwise capable adults.

  5. Reminds me of the story of the little-old-lady who bought a new car, then a year later had to get the tires replaced. The mechanic looked at the tires, and determined she was driving on them with way too little air in them.

    He asked her, “Maam – didn’t you ever put air in these ties?”

    She said, “What do you mean? Didn’t they come with air in them when I bought them?!?!”

    You can’t presume everyone has the same understanding of reality!

  6. Another tidbit new bankers often don’t know; if you owe a bank money and decide to do as the author did and just open another bank account somewhere else, if they report you to Chex Systems (the inter-bank reporting agency) other banks WILL close your open accounts and blacklist you from opening new accounts at pretty much any bank in the US for 5 years or until you settle your debt with the reporting bank. This happened to a friend of mine and happened to me for 1-day (I got the notice, paid the balance, had the bank fax a letter to Chex Systems to remove the record, etc).

    Lessons learned the hard way for most of us. Hopefully financial education in the future will prepare kids properly.

  7. I have a teenage son and he decided he wanted to use the bank near the house instead of the credit union that we use. I will say that the lady who opened his account for him was fantastic. She explained everything in detail. Helped him get setup online. Listened to him about how he planned to use the checking and savings accounts and made sure he got the accounts that were best for college students ( no ATM fees even at other banks). I made a point of making sure the bank president knew how great she was. Since then my son has several friends who have opened their accounts at this bank. I would tell you the name but it is a small hometown bank. Too bad everyone couldn’t have this experience.

  8. @ prozacula – I would disagree with you on checks being more obvious than credit cards to an 18 year old…from personal experience. You’re assuming because perhaps it was to you. However, other people have different levels of financial education and it really comes down to what they are taught and the level of help they receive when they open their first account.

    @ FB – Unfortunately, there’s a lot we take for granted in finance and I often find myself wondering why people don’t know things. When I’m dealing with someone asking my what I deem as pretty obvious questions, I step back and remember this story. I bet the personal banker helping me thought it was pretty obvious what was going on, but they never actually explained it to me. I didn’t know until I was told.

    @ Slackerjo – I hate checks, too! I very rarely write them these days.

    @ 444 – They can really sucker punch college kids sometimes. Although, USAA is a great company and if I could do business with them, I totally would.

    @ Steven – Exactly! That’s a great parallel!

    @ Jace – Yes and no. In my case, I hadn’t been reported yet. It takes a little bit of time before they report you to either Chexsystems or Telecheck. I’ll probably be covering this in detail in an upcoming post, so I won’t go into it here, but the banks do not remove you from Chexsystems once an item is paid. They will update the records to reflect the balance has been paid, but you still show up for five years – at which point you fall off their records. And some banks may not close out your accounts if you pop up on the list after the fact, but will monitor you. Other banks may offer the second-chance checking which allows you to open an account despite being on Chexsystems.

    @ Debtfree2009 – That’s great! There are some of us out there in the land of banking that actually have our customer’s best interests at heart. We genuinely want to do what’s right for the customer and not what’s an easy sale for us. I’m glad to read that the banker took her time to explain things to your son. I’m also willing to bet, though that you’ve passed on some financial lessons over the years, so you probably made her job a little easier.

  9. @ Kristy – I’m sure it’s up to the individual bank but in my situation my new bank out here in CA called me and let me know that my name popped up on some alert report from ChexSystems from my old bank in NY and that I had to take care of the debt and have the NY bank fax them a letter stating it was taken care of. As far as having records removed, it’s always negotiable; just as it is on your credit reports. If you have the reporting bank fax a letter to Chex Systems requesting that the record be “deleted” (specific verbiage), they will remove it.

  10. @ Jace – Yes, I’m aware of that and that’s what I said. It does vary per institution – some will accept a letter, some will just monitor you, and some will have the second-chance checking.

    As far as removing the file, while it’s true it can be done, it isn’t done often at all. Most banks want to keep you on that list to let other banks know you have a history of account abuse. I always advise people to double-check if they were told it was done. That may not have actually been the case. But, it can be done, as you said, with the specific verbiage from the bank.

  11. I’m in favor of making a personal finance class a mandatory high school subject :)

    Nothing overly complex, but a high school graduate should be able to balance a checkbook and fill out a 1040EZ when they graduate. Surely balancing a checkbook is as important as trigonometry …

  12. @ kosmo – I personally think that basic finance is much more useful than trigonometry, but that’s just me. The credit union I work for is working on setting up a class within the local high schools, but we’re not getting a lot of interest from the board of education. They take the stance that it’s the parent’s responsibility to teach kids about finance.

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