A solid credit score can often come from an unlikely source: your checking account. With a little bit of planning a checking account can be shaped and formed to create a financial bulwark, a cheap and easy defense against late payments, unpaid bills and other financial hazards that can quickly sink your credit standing.
A checking account is likely to be the one banking service that you use daily if not more often. Withdraw money from an ATM and the odds are that you're taking money from a checking account. Pay for dinner with a debit card and the probability is that the money is really being withdrawn from your checking. Order goods online with electronic payment system and you'll find that the dollars to pay for your purchase routinely come from checking accounts.
For many households checking account is the center of the financial universe, the one place where money comes and goes in a very visible way. More importantly, at a time when credit scores are central to borrowing checking accounts can be used to improve your financial standing.Here's how:
Credit & Late Fees
Late fees are a rich source of income for many types of accounts. For instance, fail to pay your mortgage on time and you might be slapped with a five percent charge. Utility bills, cable charges, student loans, automobile payments and many other types of obligations routinely give the creditor the right to charge late fees.
Worse, if a late payment falls through the cracks and remains outstanding for at least30 days it can show up on your credit report. That becomes a big deal because it can directly impact credit scores and a lower score can lead to higher interest rates and even the denial of financing.
Given that bills must be paid anyway, late fees are nothing but a needless add-on cost, a delight for creditors. The way around this problem is to pay bills on the day they come in, but if you want to save stamps and time, the easier approach is to schedule automatic payments from your checking account.
Under federal rules, creditors are not supposed to pyramid late fees.According to the Federal Reserve, pyramiding is defined as the imposition of a late fee "when a consumer makes a full loan payment on time or within the grace period, solely because the consumer did not pay a previous late fee imposed on an earlier installment."
The beauty of automated payments is that they end the possibility of late fees and pyramiding for the very simple reason that you're never going to be late. In addition, creditors like automatic payments because they no longer have to deal with envelopes and paper checks.
Line of Credit
Automated bill payments certainly makes sense, but they assume that checking accounts always have enough money in them to support required payments. The reality is that we all have moments when checking account balances go from lofty heights to – um – sea level and below, events which can set off lots of fees.
Some banks, according to the Consumer Financial Protection Bureau, "limit the number of overdraft charges in a day to two; other banks have no cap on fees or caps that allow as many as 12 overdrafts and non-sufficient fund fee sin a day. Similarly, some banks will not charge an overdraft fee foray item that overdraws the account by less than $5 while other banks charge fees on every overdraft transaction regardless of size."
How much you might actually pay in overdraft charges varies according to where you have your checking account. The CFPB says that "the average consumer who overdrew his or her account paid $225 in overdraft and insufficient funds charges over the course of one year."
To get out of this maze of charges, overcharges and creditor late fees there are two solutions: First, keep a safe balance in your account. Second, on top of that get a line-of-credit tied to your checking account.
There are several attractions to a checking account line-of-credit:
First, they're cheap -- about $25 annually to have a line set up.
Second, they prevent late fees for minor overdrafts.
Third, up to the credit line limit they assure that automated payments are paid, thus avoiding late fees from creditors and bounced check charges.
Fourth, a checking account line is easy to set up. As an example, we recently increased the size of our line. In today's world of strict banking standards this is essentially the equivalent of opening a newline. What did the bank require? A two-page loan application, a recent pay stub and copies of two tax returns. How long did it take to get approved? Two days.
It may be that you will never use your line but it's good to know it's there, just in case. If you do use your line always make a point to repay the debt immediately because while your bank is happy to extend a line of credit for checking accounts, it's not about to offer unlimited withdrawals.
For more information regarding checking account lines speak with officers at your bank, credit union or S&L.