Checking study: Fees for
bounced checks rising
Second in a five-part series: Checking Madness
By Libby Wells • Bankrate.com

Of all the costs that come with having a checking account, nothing stings worse than bouncing a check. But with banking more complicated than ever, keeping track of checking account balances can be extremely difficult for busy people.

According to Bankrate.com's latest semiannual checking account price study, the penalty that banks impose for the infraction is becoming increasingly severe.

But you can slap down those bouncing check charges with a little inside information and some clever account management.

NSF fees rising
A survey of 353 financial institutions in the 35 largest cities in America found that the average nonsufficient funds (NSF) fee has risen to $23.06 per check, up $0.76 from six months ago and $1.31 higher than last year, when fees averaged $21.75.

The most common charge, however, is $25.

Some metropolitan areas are even steeper, the study finds. Philadelphia averages $29.72 per bounced check. One bank in that city, Commerce Bank, charges $32.

Sacramento, Calif., the survey finds, has the lowest average at $14.33.

Nonsufficient funds fees reap giant profits for banks, according to a June 1998 report by the Consumer Federation of America.

Profiting from your mistake
The study found that banks generated more than $5.2 billion a year in bounced check revenue and $918 million from charging their customers for depositing someone else's bad check.

"Banks are charging 11 to 32 times what it actually costs them to process bounced checks," the CFA study said, "and nine to 11 times what it costs to handle deposited checks that bounce."

One method some banks use to maximize those fees is to clear the biggest checks first rather than process them in the order they are received. This means smaller subsequent checks bounce, allowing banks to charge you more than once.

Pros and cons of punishment
Jim Mataya, a regulatory specialist in the government relations division of America's Community Bankers, a Washington, D.C., trade group, says bounced check fees are high because they are intended to punish.

"I know that's a touchy point and a lot of people don't understand, but it's a penalty. That's the message here," he says. "Like a parking ticket, it's punitive. It may sound harsh, but there's a lot of legal precedent there to make it justifiable for banks."

But consumer advocates say bounced-check fees are exorbitant and they deplore bank tactics to maximize those profits.

Laura Polacheck, senior analyst of legislation of public policy for the AARP, an advocacy group for older consumers, says banks are gouging people.

"It's unconscionable for banks to purposely bounce checks. It certainly does not cost them $25," she says.

"And I don't see any justification for charging customers to deposit a check that bounces. Obviously, if they deposit it they think it's good.

"Where is the culpability on the customer? There should be no punitive aspect to that."

Besides what banks charge, consumers get hit at the other end, too, by the merchant who received the bad check.

Protection from the dreaded bounce
There is, however, some relief in the form of overdraft protection -- where the institution pays the check when there is not enough money in the account to cover it.

There are choices when it comes to overdraft protection, but according to Bankrate.com's study, the lowest-cost choice is a checking account linked to a savings account.

The most expensive option, and the one most commonly offered by banks, is a line of credit, the survey finds. A third option is a credit card charge.

With any of the options, the bank automatically moves the money into your checking account to cover the overdraft.

Bankrate.com's analysis found numerous advantages to the savings account link. There is an average transfer fee of $4.63, but the pluses offset that cost:

• You can avoid an annual fee. The survey found 98 percent of institutions don't charge a flat yearly rate for this service.
• It's the only protection available to all customers. Applications and credit approvals are required for a line of credit and credit card.
• A transfer from savings is commonly limited to the exact amount of the overdraft, whereas credit line and credit card withdrawals are moved in incremental amounts. For example, the bank might move $200 from a line of credit line or charge card to cover an overdraft of $101.
• You aren't charged interest to use your own money. With credit lines and credit cards, the interest rate clock starts ticking immediately and goes until the amount is repaid. The average annual percentage rate for the credit line is 17.1 percent; 15.9 percent for credit cards.
• There is no specific repayment schedule and, therefore, no risk of late fees.

However, customers who use their savings account to cover overdrafts need to watch their bottom line to make sure they don't incur a fee for dipping below the required minimum balance.

Some simple precautions
To dodge the bullets of bounced check fees, or minimize their costs, consumers need to:

• Balance their checkbooks regularly, taking into account debit transactions and fees.
• Compare monthly statements to the checkbook as soon as they arrive.
• Make balance inquiries over the phone, the Internet or at the ATM to get more up-to-date information -- but be wary of fees charged for balance inquiries made at ATMs.
• Designate an overseer for a joint account.
• Consider rounding off check transactions to the next dollar instead of to the penny. This can help cover overdrafts and fees, and leave you with some extra bucks at the end of the month.
• Ask your bank in what order they process checks to avoid the "biggest first" fee fiasco.

Janice Shields, director of the Institute for Business Research and the author of the June 1998 report for the Consumer Federation of America, urges customers to compare the price of overdraft protection, but adds: "The better thing to do, and the cheapest, is to balance your checkbook."

-- Posted: Oct. 19, 1999