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Consumer Action finds that overdraft protection can be a cost effective way to prevent expense and embarrassment of bounced checks.

June 4, 2003 - The optional banking service known as overdraft protection is a widely available and cost effective way to avoid the embarrassment and growing expense of bounced checks, finds a new survey by Consumer Action. (Click here for link to survey.)

The San Francisco-based national non-profit organization surveyed 26 banks nationwide and found that all but one offered overdraft protection, a service that allows you to write checks for more money than you have in your account. The overdraft is covered automatically from a designated line of credit, credit card or savings account.

Consumer Action’s survey, conducted during March and April 2003, appears in the Summer 2003 issue of Consumer Action News, the organization’s newsletter. The survey also can be found on Consumer Action’s web site. Surveyed banks include the nation’s largest banks as well as important regional institutions.

A bounced check can be an expensive mistake. At surveyed banks, fees ranged from a low of $14 for each of the first three annual bounced checks at Bank of America to a high of $35 that customers of U.S. Bank pay in some states. Of the 26 banks surveyed, nine (35%) charge $30 for each bounced check. Bounced check fees usually are charged on each check that bounces, even if several bounce in the same day.

To gauge the potential savings of overdraft protection, Consumer Action compared plans 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. In these examples, all advances were paid back along with any interest after seven days:

• Using overdraft protection linked to a credit card, Consumer Action found that fees saved by using overdraft protection ranged from $86.50 (First Union/Wachovia) to $82.52 (Wells Fargo).
• Using an overdraft protection line of credit, Consumer Action found possible savings ranging from $89.71 (Bank of New York) to $31.50 (Union Planters Bank).
• Using overdraft protection linked to a savings account, Consumer Action found possible savings ranging from $79-$100 at U.S. Bank, where the bounced check charges vary by state, to $37 at Bank of America.

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

1. Savings-linked: Nineteen of the surveyed banks offer plans which link your checking account to your savings account and transfer money when needed to cover checking overdrafts. Of these, one bank has a monthly fee of $3 (Citizens Bank) and one has an annual fee of $10 (BB&T). While the remaining banks surveyed do not charge a fee to link your savings account to overdraft protection, four charge monthly maintenance fees if savings accounts dip below a required minimum balance (Comerica Bank, Fifth Third Bank, Regions Bank and Sun Trust Bank). Eighteen have transfer fees of $5-$10. Only Citizen’s Bank has no transfer fee.

2. Lines of credit: Twenty of the surveyed banks offer unsecured loans, or lines of credit. In order to open a credit line you must permit the bank to review your credit history. 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 money in your account to cover it, you get an automatic loan subject to the amount of your credit limit.

The interest rates on surveyed lines of credit range from 7.50% (Wells Fargo Bank) to 21.90% (Chase and U.S. Bank).

Twelve banks have annual fees on overdraft protection lines of credit, ranging from $5 (Citibank, for all customers except those in New York) to $50 (Union Planters Bank). One bank (National City Bank) has a fee of $2 per month. Eight of the banks have per day transfer fees ranging from $3 (HSBC) to $10 (PNC Bank and Wells Fargo Bank).

3. Credit card-linked: Eight banks offer overdraft protection by linking it to a credit card. You must have a credit card with the bank to qualify. CA found no annual fees on surveyed overdraft protection plans linked to credit cards. Interest rates on the credit cards range from 8.99% (SunTrust Bank) to 19.99% (Wells Fargo Bank and Fifth Third Bank). The 8.99% rate offered by Sun Trust Bank is its lowest, available only to people with excellent credit. Seven banks charge transfer fees on credit card overdraft protection, ranging from $3 (HSBC) to $10 (Wells Fargo and SunTrust Bank).

CA found that the amount advanced or transferred to cover an overdraft varies widely by bank and type of overdraft protection.

On lines of credit, two banks (TCF Bank and Wells Fargo Bank) give you a minimum of $300. U.S. Bank advances the coverage in multiples of $200, while four other banks dole out the money in multiples of $100 and two in multiples of $50. Eight banks surveyed give you the exact amount, while Washington Mutual Bank adds a $25 cushion and PNC Bank hands out a minimum of $50.

With credit card advances, the banks are more conservative. Of the eight surveyed banks offering the service, four make advances in multiples of $100, two in $50 increments and two in the exact amount.

The majority of banks (12 out of 19, or 63%) that link overdraft protection to your savings account transfer only the exact amount. Five banks transfer your savings in multiples of $100, while Washington Mutual Bank adds a $25 cushion and PNC Bank hands out a minimum of $50.

Transfer fees are charged each day you trigger overdraft protection. According to the survey, you are most likely to encounter transfer fees on overdraft protection plans linked to a credit card or a savings account. Of the eight surveyed banks offering a credit card option, seven plans have a transfer fee, ranging from $3-$10 per day. Of the 19 surveyed plans linked to savings accounts, 18 charge transfer fees ranging from $5-$10 per day. By contrast, 8 out of the 19 banks that offer overdraft protection with a line of credit charge transfer fees, with a range of $3-$10 per day.

Consumer Action found four banks—Bank of New York, Chase, TCF Bank and U.S. Bank—offering overdraft lines of credit without annual fees or transfer charges.