How much do courtesy overdraft-protection, or bounce coverage, plans cost?
Plans vary, but most banks charge a flat fee (often $20 to $30) for each item they cover. And many set a dollar limit on the total amount your account may be overdrawn at any one time. For example, the bank might cover overdrafts up to a total of $300, including all the fees. In addition, some banks charge a daily fee say $5 a day for every day your account is overdrawn.
Example: Suppose you forgot that you had only $15 in your account and wrote a check for $25, used an ATM to get $40 cash, and used your debit card to buy $30 worth of groceries. In these 3 transactions you’ve spent a total of $95--and overdrawn your account by $80 ($95 - $15 = $80). How much will your forgetfulness cost you?
If you have a courtesy overdraft-protection plan, your bank may decide to cover all 3 transactions. And each of the 3 overdrafts will trigger a fee. You will owe your bank the $80 that you spent even though it wasn’t in your account, plus the 3 overdraft fees. If your overdraft fee is $25 per overdraft, you will owe your bank $155: $80 + $75 (3 x $25).
What are some other ways to cover overdrafts?
Banks, savings and loans, and credit unions may provide other ways of covering overdrafts that may be less expensive. Ask your bank about these options before making your choice. You may be able to:
Link your checking account to a savings account you have with the bank. If you overdraw your checking account, the bank can transfer funds from your savings account to your checking account. Ask your bank about transfer fees.
Set up an overdraft line of credit with the bank. You need to apply for a "line of credit" just as you would apply for a regular loan. If you overdraw your account, the bank will lend you the funds by using your line of credit to cover the overdraft. You will pay interest on this loan, and there may be an annual fee. But the overall costs may be less than the costs for courtesy overdraft-protection plans.
Link your account to a credit card you have with the bank. If you link your account to a credit card, any overdraft amount becomes a cash advance on your credit card. You will probably be charged a cash-advance fee, and interest charges on the advance will start immediately. The cost of this option depends on the interest rate on your credit card and how long you take to pay back the advance.