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It should come as no surprise that banks have come up with yet another "service" that can cost you a lot of money if you're not careful. Beginning in the late 1990s, a new type of overdraft plan was introduced that comes with hefty fees, and the worst part is that you may have been enrolled in it without even knowing it. There are now over 1500 banks nationwide offering this service.
This new service is called "courtesy overdraft" or "bounced check protection" and the bank usually gives it as a standard service for all their customers meaning that you have to opt-out of it on your own. The catch is that the service sounds quite appealing unless you understand the way it really works and how the fees are applied. Unlike regular overdraft protection, you don't have to apply for a line of credit and the banks don't charge a monthly or annual fee for the service. If you inquire about it, the bank will surely emphasize that if you accidentally write a check over your account balance, you don't have the embarrassment of a bounced check and you avoid paying any return fines from the store.
In this sense, it appears to be similar to a standard overdraft protection policy without the hassles of getting a line of credit and without any yearly fees. The standard overdraft protection policy keeps your check from bouncing by drawing on your savings account, a pre-approved line of credit or a credit card when there are insufficient funds in your checking account and were originally created as a service for good bank customers. The courtesy overdraft uses the bank's money and were created to target customers living from paycheck to paycheck.
The problems with the courtesy overdraft protection start to surface when you actually go over your checking account limit. The bank charges huge fees to cover the amount - from $20 to $40 per check. Some banks charge another $5 per day until the funds are placed back into the account to cover the shortfall. If you don't payback the funds within a certain number of days, sometimes as short as a week, the issue can be turned over to a collection agency.
Furthermore, the bank is under no obligation to cover the check that has overdrawn the account so there is no guarantee that the check won't bounce. The amount that they approve for this services varies from $100 - $1,000 and is up to the bank's discretion. The fine print almost always says that the bank reserves the right not to pay a check and thus is under no obligation to cover any overdraft.
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Worst of all, some banks play games to make it more likely that you will go over your limit. They place the courtesy overdraft amount into your regular account so when you see the balance, you don't see the actual amount of money you have, but a combined total of the money you have plus the courtesy overdraft money. Thus looking at your balance alone, you can easily misunderstand that you have more money in the bank than you actually do. Many banks also allow customers to overdraw accounts with ATM and debit-card transactions.
Some banks also increase the chances that you pay more in fees by processing and clearing the highest denomination checks first, not in the order they actually arrive. For example, if you had $500 in your checking account and wrote checks for $5, $10, $15, $20 and then a large check for $500, the bank may clear the $500 check before the smaller checks. This would mean instead of having to pay the courtesy overdraft fee for one check, you would end up having to pay the fee on four checks.
If you are unsure whether or not you're enrolled in a courtesy overdraft protection program, the first step you should take is to call or visit your bank and ask. If you have been enrolled, ask to be removed. Make sure to follow up your removal request in writing.
If you find that you do bounce a check from time to time, sign up for standard overdraft protection plan. The standard overdraft protection will usually have a yearly fee and the money used when there aren't enough funds in your account will be taken either from a savings account, a line of credit you have applied for or a credit card. The fees involved will be much better than the courtesy overdraft protection.
This new service is called "courtesy overdraft" or "bounced check protection" and the bank usually gives it as a standard service for all their customers meaning that you have to opt-out of it on your own. The catch is that the service sounds quite appealing unless you understand the way it really works and how the fees are applied. Unlike regular overdraft protection, you don't have to apply for a line of credit and the banks don't charge a monthly or annual fee for the service. If you inquire about it, the bank will surely emphasize that if you accidentally write a check over your account balance, you don't have the embarrassment of a bounced check and you avoid paying any return fines from the store.
In this sense, it appears to be similar to a standard overdraft protection policy without the hassles of getting a line of credit and without any yearly fees. The standard overdraft protection policy keeps your check from bouncing by drawing on your savings account, a pre-approved line of credit or a credit card when there are insufficient funds in your checking account and were originally created as a service for good bank customers. The courtesy overdraft uses the bank's money and were created to target customers living from paycheck to paycheck.
The problems with the courtesy overdraft protection start to surface when you actually go over your checking account limit. The bank charges huge fees to cover the amount - from $20 to $40 per check. Some banks charge another $5 per day until the funds are placed back into the account to cover the shortfall. If you don't payback the funds within a certain number of days, sometimes as short as a week, the issue can be turned over to a collection agency.
Furthermore, the bank is under no obligation to cover the check that has overdrawn the account so there is no guarantee that the check won't bounce. The amount that they approve for this services varies from $100 - $1,000 and is up to the bank's discretion. The fine print almost always says that the bank reserves the right not to pay a check and thus is under no obligation to cover any overdraft.
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Worst of all, some banks play games to make it more likely that you will go over your limit. They place the courtesy overdraft amount into your regular account so when you see the balance, you don't see the actual amount of money you have, but a combined total of the money you have plus the courtesy overdraft money. Thus looking at your balance alone, you can easily misunderstand that you have more money in the bank than you actually do. Many banks also allow customers to overdraw accounts with ATM and debit-card transactions.
Some banks also increase the chances that you pay more in fees by processing and clearing the highest denomination checks first, not in the order they actually arrive. For example, if you had $500 in your checking account and wrote checks for $5, $10, $15, $20 and then a large check for $500, the bank may clear the $500 check before the smaller checks. This would mean instead of having to pay the courtesy overdraft fee for one check, you would end up having to pay the fee on four checks.
If you are unsure whether or not you're enrolled in a courtesy overdraft protection program, the first step you should take is to call or visit your bank and ask. If you have been enrolled, ask to be removed. Make sure to follow up your removal request in writing.
If you find that you do bounce a check from time to time, sign up for standard overdraft protection plan. The standard overdraft protection will usually have a yearly fee and the money used when there aren't enough funds in your account will be taken either from a savings account, a line of credit you have applied for or a credit card. The fees involved will be much better than the courtesy overdraft protection.