Beware of Bounce Protection
When payday came, Mary paid back the overdraft for her car payment, plus the $25 fee, plus $5 per day for every day she had been overdrawn. When car insurance was due, her balance was still low, so she wrote the check anyway, knowing the bank would cover it again.
Before long, Mary exhausted the entire $1,000 courtesy overdraft limit and had spent several hundred dollars in fees ($150 in fees in just one pay period). She was being charged 17% interest on the $1,000 balance and had no way to repay it.
This is a scenario that is happening to more and more people. And Mary's story illustrates the problem.
If you write a check, make an ATM withdrawal, use your debit card, or have an automatic payment deducted from your checking account when you don't have enough money in your account to cover it, you'll overdraw your account.
Your bank can either honor your check or debit, even though you don't have enough money in your account to cover it, or they can bounce your payment, sending it back to the person or business you were paying.
The bank will charge you a fee for insufficient funds and often the business you wrote the check out to will charge you an additional fee for a returned check.
What Is Overdraft Protection?
Overdraft protection is a good safety net to protect you against these types of problems, but if you're not careful it can become a crutch that encourages irresponsible financial behavior. Don't have enough money in your checking account to pay for that leather coat that's on sale for only one day? No worries. Just write a check and let your overdraft protection cover it. It's a dangerous road to go down.
Traditional overdraft protection is a line of credit (loan) provided by your bank that automatically protects you against checks or ATM withdrawals that exceed your bank balance. If you sign up for standard overdraft protection, your overdrawn check will be paid by the bank, with no charges for insufficient funds. You agree in advance to have the overdrawn amount deducted from your savings account, added to your line of credit, or charged to your credit card. You know the fees and interest charges ahead of time.
What Is Courtesy Overdraft or Bounce Protection?
Banks have created a service called "courtesy overdraft" or "bounce protection." This may seem like standard overdraft protection if you don't look too closely, but beware. They're not the same.
In addition to an overdraft fee of $35 to $40 for each check that exceeds your balance, many banks charge anywhere from $2 to $10 per day until you pay off the overdraft account balance. Some banks require you to pay the balance in as little as five or as many as 30 days.
How Does Overdraft Protection Differ From Courtesy Overdraft or Bounce Protection?
With traditional overdraft protection, banks don't charge you a fee for insufficient funds. There may be a fee for the transfer to your checking account from your savings account or credit card, but it's usually much lower than an insufficient funds charge.
There's also no daily fees with traditional overdraft protection, other than interest.
Because banks don't call bounce protection service a loan, they're not required by law to reveal the true costs to you. There's also no guarantee that the bank will cover your overdraft, so you could end up bouncing checks even though you thought you were protected.
The real problem is that some people use bounce protection as a short-term loan, but this is an extremely expensive form of credit, similar to pay-day loans, which are a consumer rip-off.
The best way to avoid the exorbitant fees of bounce protection is to follow these tips:
- Manage your checking account.
- Record checks, ATM withdrawals, automatic debits, and bank fees in your check register immediately.
- Don't rely on what the bank shows as your balance. You may have written checks that haven't reached the bank yet, or forgotten to record an automatic debit, and you could end up overdrawing your account.
If you find yourself regularly running out of money before you get your next paycheck, or accidentally overdrawing your account, consider a spending plan (aka "budget"). For everything you need to know about budgeting, see "Budgeting 101".
