Banks can clear checks in any order
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 Dear
Dr. Don,
Does a bank have to clear for payment the smallest debit before it clears a larger debit? Bank of America recently cleared a large check first on my account causing a negative balance, then cleared several small ones thus charging me with several overcharge fees.
I thought under law they had to clear the smallest ones first.
-- Greg Grievance
 Dear
Greg,
Banks typically clear checks by the amount of the check and are
under no obligation to clear the smaller checks first. I've seen
this presented as a courtesy to the account holder, because it's
more likely that the larger checks are for payment of important
bills, such as the mortgage, and clearing in this manner keeps you
from being late with the mortgage.
It's actually worse than that. Banks typically clear
payments before they clear deposits. Still, I'm sympathetic to your
situation. If the bank only cleared smaller to larger, there would
be fewer insufficient funds, or NSF, charges in the account.
You also have to worry about NSF issues because they
can show up on your consumer banking report. The primary banking
report is ChexSystems. Like a credit report, the banking report
shows account relationships and reports negative information, such
as NSFs. Negative information stays on your report for five years.
These reports fall under the Fair Credit Reporting Act,
or FCRA, and the Fair and Accurate Credit Transactions Act, or FACTA.
The FCRA has provisions allowing you to dispute inaccurate information
and FACTA permits you to get one free report, annually, from consumer
reporting agencies. You can get your free Chexsystems report from
www.consumerdebit.com.
The crux of the problem is that a checking account,
also known as a demand deposit account because payments are available
on demand, requires the account to have funds in order to make payments.
If you're having trouble with NSFs you should look into some form
of overdraft protection. That can be a line of credit or a savings
account that is tied to the checking account.
The Federal Reserve Board publication, "Protecting Yourself from Overdraft and Bounced-Check Fees," provides a nice overview of the importance of avoiding these fees by keeping enough liquidity in your checking account, and how to decide among the different approaches to overdraft protection.
To ask a question of Dr. Don, go to the "Ask
the Experts" page and select one of these topics: "financing
a home," "saving & investing" or "money."
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