Bounced check coverage can be a waste of cash

Published 7:52 pm Friday, June 20, 2008

Question: My bank offers overdraft protection. Should I use it?

Answer: If you are known to bounce a check from time to time, you need a system in place to keep you from paying hefty fees. But be aware of what protection you’re signing up for — “bounce coverage” for many people can be a waste of money.

What is overdraft protection? It’s an agreement that if you make a payment that exceeds your bank balance, your bank will pay the merchant automatically. Essentially, it’s a very temporary loan from your bank, so you can stay in good standing with the seller, and avoid a returned-check fee from the merchant.

A bounced check with no protection usually results in a $20 to $30 fee from the bank, as well as a $20 to $30 fee from the merchant. With the typical overdraft protection plan, this penalty is cut in half — you only have to pay the bank’s $20-$30 fee as long as you put money back into the account quickly.

Still, that’s $20 to $30 that you have to pay for the error — no small potatoes if you overdraw your account a few times a year, or if you are swiping your debit card for an entire weekend without knowing that your account is overdrawn. (Each overdraft prompts a separate fee.)

The best option for most people — and one that most banks offer, according to the online service Bankrate.com — is to link a savings account to your checking account. The cost of a transfer is about $5 to $10, much less than the usual overdraft fee.

If you don’t have a savings account at your bank, start one for this reason, McBride recommends.

Another choice is to link your checking account to your credit card. This way, you get a cash advance for a nominal fee that goes into your checking account to prevent you from overdrawing. This plan is only good for people who pay off their credit card balances regularly; the interest rate on the cash advance can spike over a fairly short period of time.

Associated Press