Bounced-check fees rise again

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Nonsufficient funds (NSF), or bounced-check fees, rose 2.1 percent to an average $29.58 from last year’s $28.95, according to our 2009 Checking Study. This represents just the latest in a long line of record high increases; the average fee was $21.57 in 1998. The trend is obviously popular with banks as institutions increasing the NSF fee outnumber those decreasing the fee by a margin of more than 8-to-1.

There’s an understandable basis for charging a fee when someone bounces a check. But hiking the fee by more than 2 percent — at a time when money market accounts pay an average of 0.32 percent and customers have to tie their money up for five years to get an average yield of 2.19 percent on a CD — seems a bit rich.

Serial check bouncers will find higher fees await them in the form of a tiered fee structure. About 26 percent of the banks surveyed charge more for the second overdraft during a rolling 12-month period — so if you bounce a check in December, don’t think that you’ll get a fresh start come January. The average cost for the second through fourth overdraft is $33.88. Bounce a fifth check and 17 percent of the banks surveyed have a third tier that ratchets the cost of the overdraft to an average $36.19.

On a brighter note, institutions that have a tiered structure tend to cut you some slack on the first overdraft. The average fee for that is $24.58. Perhaps they suspect they’ll make it up handsomely as other overdrafts come rolling in.

Watch a video on the surge in overdraft fees.

Average NSF fee grows

The interesting development this year, as mentioned earlier, is that some banks are revising their overdraft policies.

Banks have two forms of overdraft protection. One links the checking account to a savings account, credit card or line of credit and debits that secondary account when the customer overdraws their checking account. The type of protection requires the customer’s signed consent and is usually set up when the checking account is opened. The fees associated with this account are very low.

The second form of overdraft protection is the one that is much maligned. This is a service that most banks provide to checking account customers without the customer’s formal consent. Although there is no guarantee that overdrafts will automatically be covered, consumers generally are covered if they overdraw their account within certain limits, often $200 to $1,000. Some banks have been criticized for potentially confusing customers by including the amount of overdraft protection in balance inquiries.

When the overdraft is paid, the customer is charged the bank’s normal NSF fee. On top of that there may be daily fees until the overdraft is repaid and, usually, the customer has to repay the debt within two to four weeks or their account may be closed.

Customers can overdraw their account by check, by using a debit card while making purchases, or at the ATM. When a customer has multiple debits that arrive at the bank in the same day, banks will commonly post the debits from largest to smallest. If the first debit overdraws the account, the customer will face multiple overdraft fees.

After years of criticism, Bank of America, Chase and Wells Fargo became the first banks to implement changes in how they will handle overdrafts.

Bank of America says it won’t charge overdraft fees on more than four items per day. Ironically, this is the second policy change on this practice the bank has instituted. Earlier this year, BofA doubled its limit from five to 10 overdraft fees per day. Among other changes, the bank will “improve the process” for customers to opt out of automatic overdraft, not charge overdraft fees when a customer’s account is overdrawn by less than $10 for one day, and introduce an annual limit on how many times an account can be overdrawn at the cash register when they don’t have sufficient funds to cover the purchase.

Some of the changes Chase says it’s making are eliminating overdraft fees if an account is overdrawn by $5 or less, and reducing the maximum number of overdraft fees per day to three.

Wells Fargo’s changes call for eliminating overdraft fees for customers who overdraw their accounts by $5 or less, and charging no more than four overdraft fees per day.

These changes will certainly benefit customers, but overdrawing a checking account will always be an expensive mistake.

Most consumers can avoid the fees we’ve addressed in this report with just a little bit of effort. Read the Bankrate feature “6 tips to avoid checking account fees” and start saving money.

Check out the results of our 2009 Checking Study for more information.

Methodology surveyed the five largest banks and the five largest thrifts, based on deposits, in the top 25 metropolitan markets across the country. We looked at one interest and one noninterest checking account from each institution where available. In all, there were 245 interest accounts and 228 noninterest accounts from 248 institutions. In addition, 16 interest accounts and five noninterest accounts were surveyed from 17 online banks. The surveys were conducted during August 2009.