Posted on: Thursday, June 12, 2003

THE COLOR OF MONEY
Overdraft protection on your checking account often worth the cost

By Michelle Singletary

Have you ever bounced a check?

I have. Not many and never because I didn't have the money.

Once I bounced a check because I forgot to make a deposit before I left for vacation. When I returned and saw that $25 bounced check fee on my statement, I was jumping hot mad. I should have been more careful.

But you know, life happens. We imperfect beings are bound to make a checking account mistake. You may forget to record an ATM withdrawal, or you deposit a check that doesn't clear in time to cover the checks you've written.

So to be safe, consider getting overdraft protection. This is a service that banks offer to cover checks when you have insufficient money in your bank account.

Overdraft protection is a very underused service, according to Linda Sherry, spokeswoman for Consumer Action, a San Francisco-based nonprofit consumer education and advocacy organization.

"We've looked into overdraft protection three times over the last eight years, and each time we have found that it's actually worth the cost when compared to bouncing checks," Sherry said. "In this day and time of debit cards and a lot of ATM withdrawals, it's not hard to bounce a check."

And a bounced check fee can really sting. In a recent survey of 26 banks nationwide, Consumer Action found fees ranged from $14 to $35. These fees usually are charged on each check that bounces, even if several bounce in the same day.

Consumer Action compared overdraft plans at the surveyed banks to find out what the cost would be if at one time during the course of a year, a customer bounced three checks totaling $125. Depending on which overdraft protection a consumer signed up for, the savings ranged from $31.50 to as much as $100.

Despite the savings, keep in mind that overdraft protection does come with a cost. There could be a monthly or annual fee—or both. In addition, transfer fees can be charged each day you trigger overdraft protection.

Consumer Action's survey found three common types of overdraft protection:

• Savings-linked. Under this plan, money is transferred from your savings account to cover an overdraft. Many banks do not charge a fee to link your savings account to overdraft protection. However, some do charge a monthly maintenance fee if your savings account dips below a required minimum balance. This could happen if money is transferred to cover bounced checks.

• Lines of credit. This is an unsecured loan to protect against bounced checks. The credit line sits unused until you need it to cover an overdraft. When you write a check or withdraw money from an ATM and there is not enough in your account to cover it, you get an automatic loan subject to the amount of your credit limit.

• Credit card-linked: The bank links your checking account to your credit card and automatically charges a cash advance to your card when needed to cover overdrafts.

Before signing up for overdraft protection, Consumer Action recommends that you get answers to the following questions:

• What interest rate will I be charged? Surveyed banks charged from 7.5 percent to 21.9 percent for lines of credit. Interest rates on the credit cards linked to overdraft protection range from 8.99 percent to 19.99 percent.

• How much is the transfer fee? You are most likely to encounter transfer fees on overdraft protection linked to a credit card or a savings account. For credit card overdraft protection, transfer fees ranged from $3 to $10 a day. For savings-linked overdraft, transfer fees ranged from $5 to $10 per day.

• Is there an advance minimum? Overdraft advances vary by bank—some give you the exact amount, others advance cash in multiples of $100. If the bank lends only in multiples of $300, you would have to borrow $300 (and pay interest on it) even though you only need a few dollars to cover an overdraft.

• Is there an annual fee? In the Consumer Action survey, none of the banks charged an annual fee when the overdraft protection was linked to a credit card. Most banks charged an annual fee for overdraft protection connected to a line of credit. Annual fees range from $5 to $50.

• How does paying off the overdraft work? Just depositing more money in your checking account does not automatically cover the overdrafted amount, Sherry said. It's important to pay back the overdraft specifically. Also find out if the bank will automatically deduct a minimum payment from your checking account if you haven't made a payment on the outstanding overdraft balance by the due date.

While overdraft protection is useful to have, be careful you don't use it as a crutch to make ends meet.

"If you are using overdraft a lot, you have a money management problem or an income problem," Sherry said. "If that's the case, you need to take a closer look at your financial picture."