Anyone might bounce a check on a rare occasion, but some folks do it a tad more frequently. Bouncing checks can be expensive; it’s not at all unusual to see nonsufficient funds, or NSF, fees of $35 per check. Compounding the problem is the way in which many financial institutions process checks.

Example:

Say you had $300 in your checking account and you wrote six checks totaling $375. The six checks are for $200, $12, $50, $60, $23 and $30. If they all came back to the bank on the same day, the bank could clear the last five and just bounce the one check that’s for $200. But, more than likely, the bank will clear the $200 check and the $60 check and bounce the rest since the next largest check ($50) won’t clear. You’d have to pay four NSF fees. The banks say they clear checks in this manner because they assume the larger checks are more important, such as for a mortgage payment or car loan.

How overdraft protection works

If you tend to bounce checks, you can avoid this hassle by signing up for overdraft protection. You’ll need another account with the bank like a savings account, a credit card or a home equity line of credit. If you overdraw your checking account, the bank will pay the check and take the money from one of your other accounts. As long as you have funds in one of the other accounts to cover the check, the bank guarantees the check will be paid. You’ll be charged a fee but it will be far less than an NSF fee. Plus, since your check won’t bounce you won’t get socked with a bounced-check charge from the business that received the check.

An important aspect to overdraft protection is that you have to sign up for it. The bank won’t automatically cover you just because you have a savings account or a credit card with them.

Overdraft privilege

There’s another form of protection that you don’t sign up for; many institutions automatically initiate the coverage if you overdraw your account. This type of protection is often called overdraft privilege or bounce protection, or some variation of those terms. Because of the similarities in name, it can be easy to confuse the two types of overdraft protection. An easy way to differentiate — you don’t sign up for bounce protection; you’re automatically enrolled, and it’s not linked to other accounts you may have with the bank.

Most institutions that have this type of coverage automatically enroll just about all of their checking account customers. You might receive a notice from your bank or credit union indicating that if you bounce a check or two every now and then you don’t need to worry; the institution will pay it and you’ll be charged their standard NSF fee.

Opposing the privilege

Consumer groups are adamantly opposed to this type of coverage. Here’s why.

There is no guarantee by the bank that your check will be paid. Bounce-protection plans typically limit the amount by which you can overdraw your account to somewhere between $100 and $1,000. If the overdraft exceeds that, the bank may decide not to pay the check.

And most bounce-protection plans require the overdraft and fees to be repaid within 30 days, sometimes even less, maybe two weeks. After that, the bank may send your account to a collection agency.

You can expect to be charged the bank’s standard NSF fee plus a daily fee of anywhere from $2 to $10 until the account is brought into balance.

Example:

Suppose you overdraw your account by $100 and it takes you 10 days to repay. If your bank charges a $35 NSF fee, plus $5 per day, you’re stuck for $85 in fees on the $100 that you, essentially, borrowed from your bank for 10 days. It’s easy to see why consumer groups say bounce protection amounts to short-term, high-cost credit, payday lending by banks.

Another problem with this type of coverage is that some banks include your bounce-protection limit when you do a balance inquiry by phone or ATM. If you have $300 in your checking account and you have a bounce-protection limit of $100, your balance could show $400. There may be some indication that $100 is bounce protection, but an unsuspecting customer could easily spend more than their true $300 balance and trigger an overdraft.

Denying automatic protection

If your bank notifies you that you’ve been given this automatic protection and you’re not comfortable with it, call the bank and tell them you don’t want the service; opt out of the program. If bounce protection appeals to you, be sure you get 30 days to repay the overdraft, find out if there’s a daily fee in addition to the NSF charge and ask if the institution includes the bounce protection dollar limit when a balance inquiry is made. If it does, keep that in mind when making withdrawals.

Up next, chronic check bouncers can find themselves blacklisted from getting a checking account. You’ll see why you don’t want your name to be found in ChexSystems.

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