Today, I was reminded of why it is essential for people to always have atleast two bank accounts. It’s to protect your money from a bank’s right of offset.
What is “offset”?
Very simply, it is the power of the bank to raid your accounts in order to satisfy a debt that you own to the bank. You might now realize that you agreed to allow them to do this… but, rest assured, you did. Read the terms of your banking agreement and you’ll learn that you’ve given them pre-authorization to take your money if you can’t pay your debts.
If you always pay your loans on time, then this article isn’t for you. Similarly, if you know without a shadow of a bout that you’ll always be able to pay your loans on time, then this article probably isn’t for you. These words are for everyone else.
Let’s say you have a mortgage, a line of credit, a credit card, a chequing account, and a savings account with Bank X. Without fail, you’ve paid your loans (mortgage, LOC & CC) from your chequing account. However, something happens and you can’t pay your bills. Maybe you lost your job, or you’re too sick to work. Whatever it is, you’re not in a position to pay so you don’t.
Your bank gets concerned. After all, they lent you the money and you promised to pay them back. Now, you’re not paying back your loan. Your bank may or may not understand why you can’t repay the loan, but they can’t make profits off of understandings. They make money from loan repayments. So the bank starts eyeing your savings account. Maybe this is your emergency money, or travel money, or stash to move across the country. Whatever the money’s for, the bank sees that it’s there and they decide to take what they need to satisfy the loan that you took from them.
See? They used the right of offset to take money from your savings to pay the debt that you owe them.
How can you thwart a bank’s right of offset?
It’s very easy. Get two bank accounts at two different banks. Bank X can only use the right of offset for accounts held at their bank. If Bank X wants to get their fingers on your money at Bank Q, then they have to go to court and get an order to do so. It’s a far more expensive and lengthy process to get money out of an account at a different bank.
My advice to you is simple. Always have atleast two bank accounts. Keep them at different banks. You can still set up an automatic transfer of funds. The transfer will just be from one bank to another. This allows you to build your emergency money, or short-term goal money, without fear that the bank holding your loan will raid your funds.
Ideally, you will borrow money and pay it off as fast as you possibly can. Debt is still bad, but sometimes you have to use it. When you take out debt, do not forget that the banks can take money from any of your accounts with them to repay that loan. If you have money that you absolutely do not want your lending bank to access, then put that money into an account at a bank that hasn’t given you a loan.
To be clear, I am not telling you to avoid repayment. You borrowed the money so you owe a debt. Not paying your mortgage is a financially destructive choice, which only hurts you. I would strongly urge you to avoid that course of action causes because it will cause significant problems in many other areas of your life. If you take out a loan, then pay it back as fast as you can!!!
What I’m telling you is to keep all of your money safe from lenders for as long as you can. Put it somewhere that your lending bank cannot touch without a court order. Normally, that safe place is found at another bank. You should always have atleast two bank accounts, and they should be at two different banks. Be honest with yourself. Don’t you work too hard for your money to lose control over how it’s used? I think we both know that the answer to that question is “YES!”