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At first, Lois Y. thought Washington Mutual’s new bounced-check protection plan was a godsend. She didn’t have to sign up for a line of credit or pay an annual fee. If she wrote a check that was too large for her balance, she needn’t face the embarrassment of a bounced check or pay any merchant fines. The bank simply covered the check and charged her a $22 fee.
Then Lois faced some financial setbacks and started relying on bounced-check protection continually. In one year, she paid Washington Mutual more than $4,000 in fees.
“This has truly snowballed on me,” said Lois, whose last name is being withheld to protect her anonymity. “Financially things are tight in the first place, and the charges on top of this make it impossible to start becoming financially solvent again.”
Also known as “courtesy overdraft,” bounced-check protection plans are an often costly twist on traditional overdraft protection, which allows a consumer to prevent rubber checks by drawing on a savings account, line of credit or credit card. More than 1,600 financial institutions, mostly smaller community banks and credit unions, offer such plans.
Automatic enrollment, huge fees
By contrast, courtesy overdraft or bounced-check protection uses the bank’s money, instead of the consumer’s money or credit line, to cover the checks that exceed the consumer’s balance up to a certain amount -- typically $100 to $1,000. In addition to the per-check fee, some banks tack on a daily fee of $2 to $5 until the checks are made good. Consumers must pay the money back within two to four weeks or risk facing collection actions.Other ways bounced-check protection is different from overdraft protection include:
- It’s automatic. Banks typically extend the service to some or all of their customers, who must opt out if they don’t want the coverage. With traditional overdraft protection, customers have to sign up.
- It’s discretionary -- on the bank’s part. The bank decides whether or not to cover a check; the consumer never knows for sure if a draft will be honored. With overdraft protection, the consumer signs a contract and the bank is typically obliged to honor checks that are under the plan’s limit.
- It’s costly. Traditional overdraft protection comes with a $10 to $50 annual fee, and users typically pay regular credit card or line of credit interest rates on any balances owed. With bounced-check protection, the fees banks charge -- $25 per check is average, although some go as high as $40 -- would translate into annual percentage rates of 200% to 500%, or even more.
If these sound like the rates a high-cost payday lender would charge, that’s not a coincidence. Banks watched as the $25 billion payday loan industry built huge profits catering mostly to low-income folks who couldn’t make their checks stretch to the next payday. Some banks eventually allied with payday lenders, but at least 1,600 have adopted bounced-check protection as a way to cash in on Americans’ inability to manage their money
Banks hold the cards, can boost your risk
Banks, of course, have some advantages over payday lenders -- besides having a captive, already-enrolled audience:- Banks don’t have to disclose the cost. While payday lenders are required to tell borrowers the annual percentage rates of their loans, banks don’t face similar disclosure for bounced-check protection.
- Banks can pad your account. Some banks add the bounced-check protection limit to the amount actually in the customer’s account when the customer inquires about his or her balance. So if you actually have just $100, your ATM or online inquiry will show a balance of $200 to $1,100, depending on the bank’s bounced-check protection limit. If you rely on this balance and write a rubber check (or pull out too much from your ATM or with your debit card), you incur the protection fee.
- Banks can increase the odds you’ll bounce a check. Many banks process checks in order of size, with the largest ones being cleared first. Banks say they do this because larger checks tend to be a consumer’s most important, like rent, a car payment or utilities. Critics suspect it’s just a ploy to boost profits, since banks can charge a per-check fee for all the smaller checks that subsequently bounce.