By Michelle Singletary
If, as the saying goes, life happens, the same can be said about bouncing a check. It happens, even to the most careful consumer.
James G. Edgar, a reader from Charlotte, N.C., used to work for a large bank's customer call center. In response to a recent column on overdraft fees, Edgar wrote that he's heard all the excuses for why people overdraw their account.
Here are a few classics:
A customer calls to say he couldn't possibly be overdrawn. "I have a whole book of checks left."
A pleading customer begs for the overdraft fee to be waived, claiming it was her first offense. But "after two mouse clicks, you see the 15 overdrafts in the last three months," Edgar said.
If you're one of those bank customers who just can't seem to keep from bouncing checks, get overdraft protection. It will save you some money and frustration.
Here are three common types of plans to protect you from overdrafts:
Savings-linked. Under this plan, money is transferred from your savings account to cover an overdraft in your checking account. Many banks do not charge a fee to link your savings account to overdraft protection. However, some do charge a monthly maintenance fee in case your savings account dips below a minimum balance, which could happen when money is transferred to cover overdrafts.
Line of credit. This is an unsecured loan to protect against overdrafts. The credit line sits unused until you need it to cover an overdraft.
Credit card-linked: The bank links your checking account to your credit card and automatically charges a cash advance to your card to cover overdrafts.
One type of overdraft protection consumer advocates recommend you stay away from is a "bounce protection" plan. Unlike a traditional overdraft protection plan, which keeps checks from bouncing and therefore avoids fees, bounce protection allows the bank to collect the fee anyway, according to Consumer Action, a nonprofit consumer advocacy group.
With a bounce protection plan, in exchange for covering an overdraft up to a set dollar limit, banks charge a fee similar to a "nonsufficient" funds fee, ranging from about $20 to $35 for each transaction. Some banks also charge a per-day fee of $2 to $5 until the account has a positive balance.
What's different with this plan is that customers can borrow against their bounce protection limit.
Consumer groups argue that bounce protection plans are designed to boost bank income by encouraging customers to overdraw their accounts.
Before signing up for any overdraft protection, Consumer Action recommends you get answers to the following questions:
What interest rate will I be charged? Banks may charge anywhere from 7 percent to close to 22 percent for lines of credit linked to overdraft protection. Interest rates on the credit cards linked to overdraft protection can range from 9 percent to 20 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 can range from $3 to $10 a day. For savings-linked overdrafts, transfer fees ranged from $5 to $10 per day. It's also possible you won't be charged at all.
Is there a minimum on each advance? Overdraft advances vary greatly. For example, some banks will advance you the exact amount needed to cover a transaction. Other protection programs 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.
