Paul has an account at St. Jerome Bank. He does not track his checking account balance in a checkbook register. Yesterday evening, he placed two checks in the mail for $156.66 and $238.94. Paul accesses his account online and finds that his balance is $568.40, and all the checks he has written except for the two checks from yesterday have cleared. Based on his balance, Paul writes a check for a new stereo for $241.00. Paul has no intention of making a deposit in the near future. What are the consequences of his actions?

In this situation, Paul will overdraw his checking account. He will not have enough funds to cover his expenses and will likely be charged overdraft fees by the bank.

Expert Answers

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If Paul has spent money as described in this question, he is going to run into some major difficulties. Let's take a look at what Paul has done here. He has a balance in his checking account of $568.40 when he looks at his account online. This might look okay, but we have to remember that Paul has two outstanding checks, one for $156.66 and another for $238.94. That makes a total of $395.60.

Now let's subtract that outstanding amount from his balance. When we do that, we have $172.80, and Paul has a big problem. He does not have enough money in his account to cover the $241.00 check for the new stereo. In fact, he will overdraw on his account by a total of $68.20. His balance will be “in the red,” a negative number. His funds are insufficient to cover his expenses.

When someone overdraws on a checking account, there are often some unpleasant consequences. Unless the account comes with some kind of overdraft protection (i.e., a linked savings account that the bank will use to cover the deficit), Paul will at the least be charged a fee until he deposits enough money to cover the $68.20 and the amount of the fee. This can add up quickly if Paul does not resolve the issue. If he leaves the account for too long and the fees accumulate, the bank might even close his account and send the debt to a collection agency. This would negatively affect his credit score and make it more difficult for him to get bank accounts in the future.

The best way to avoid a problem like Paul's is to keep close tabs on one's checking account balance. Everyone should use the check register provided with the account, writing down the money spent out of the account and the funds deposited and balancing the account frequently by comparing the numbers with one's online check register and bank statement. People should check their accounts online at least every few days, maintain their check registers regularly, and balance their accounts at least once a month (and probably more if the account is used frequently). Only this will prevent overdrafts.

Last Updated by eNotes Editorial on February 16, 2021
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