Banks have taken big financial hits over the past year, due in part to the sub-prime mortgage meltdown. Now, they are scrambling to recapture their losses. One of the ways banks are doing this is by charging fees. Most commonly charged are "bounce fees" or "overdraft fees" which are punitive charges to customers when they spend more than they have in their accounts.

It used to be that if you didn't have enough money in your account to cover a check you wrote, an ATM withdrawal or a debit card purchase, the bank would deny payment. Embarrassing, right? These days, banks and credit unions are far more apt to cover you if you overdraw your account, not because they care about you or want to save you the embarrassment of bouncing a check or transaction, but so that they can collect bounce fees.

There are two ways that a bank or credit union will cover your overdraft. Either they will use their money, or they will use your money.

Their money. Calling it a "courtesy bounce," the bank may use its own money to float you a short-term loan to cover your mistake. They don't ask you if you want this loan. They just give it to you, and it will cost you dearly. Even if you go over by only a few dollars, prepare to get slapped with a "bounce fee" of $29 to $39 per item.

That's not all. Most banking institutions now charge a daily fee of $5 or more each day you remain over-drafted. That's on top of the original fee and the loan they made to cover your account. If you really mess up, and you bounce several checks or keep swiping your debit card without realizing you've gone over, the fees just keep piling on.

Your money. Also called "overdraft protection," this is a provision that you must arrange for ahead of time. You can set up a line of credit (like a credit card account), called an overdraft protection account or you can identify a savings account from which you want the bank to pull the money to cover your overage. You will pay a fee to transfer the funds if this happens, but it will be considerably less than a courtesy bounce fee.

Your bank or credit union will default to a courtesy bounce plan if you have not taken the steps necessary to set up overdraft protection. Don't expect them to ask for your permission. Courtesy bounce fees have become a lucrative income stream for them.

Do you know for certain how your bank or credit union will handle overdrafts on your account? Pick up the phone and find out right now. If you do not have overdraft protection in place, set it up now, even if you believe that you never, in a million years, ever will bounce your account. Stuff happens. You'll be glad you did.

For an update on changing bank policies regarding overdraft protection programs, visit my blog, Money Rules, Debt Stinks!

September 30, 2009

Copyright © 2009 Mary Hunt. All rights reserved. Permission to reprint required.

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