Can Banks Close Accounts for Insufficient Funds?

According to the Consumer Financial Protection Bureau, Americans paid $15 billion in fees for bouncing checks and overdrawing their accounts. When clients agree with the "courtesy overdraft," they are allowed to withdraw money or write checks even with insufficient funds. Each overdraft transaction costs approximately $35. However, when clients carry on using money they don’t have, they are considered a risk to the bank and their checking account can be closed.

TL;DR (Too Long; Didn't Read)

Banks can close accounts due to insufficient funds, especially if the account holder has a history of overdrawing on his or her account.

Bank Closure Rules

Once the client is considered a risk, the bank has the right to close the account to minimize the impact. According to the U.S. Department of Treasury, banks are allowed to close an account for any reason. Typically, banks will terminate an account after 60 days of being overdrawn. However, it will depend on the internal policies of each bank.

Problems Resulting From Account Closure

Having an account terminated by the bank can cause several financial problems such as payments that will not be received, including paychecks. And banks may use paychecks to cover negative account balances. Also, the former account holder may not be able to make some payments when due if they don't have a bank account.

There are companies that specialize in checking client's credit history and background. Banks and credit institutions often use these services to research a client before they can even open an account.

Banks may also report the amount a client owes to ChexSystems and the former client's request to open an account in another bank may be denied based on this negative information.

What to do Next

Even if you receive a formal letter saying that the bank is closing your account, contact them and find out why they want to close your account. Ask how much is outstanding and try to make a payment arrangement with them. It is also important to contact your employer’s human resources so you can continue to receive your paycheck through some other means. If there are automatic payments linked to the closed account, update the payment information with each creditor.

How to Avoid Overdraft

For most banks, it’s possible to link your checking account to a savings account. In case of insufficient funds, the bank will use the secondary account instead of allowing the account to go into overdraft. This will avoid large overdrafts and the potential closing of the account in future.

Keeping a close eye on your account will also help to avoid overdrafts. Online banking is a convenient way to manage your account since you can check your balance from all your devices and sign up for online alerts by email which warn when your limit is below a preset threshold.

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