checking

Overdraft protection plans

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:

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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.

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