A bank is a business and these institutions do need to make a profit if they are to survive and compete effectively in the financial industry. However, it would seem that these days banks will do anything to squeeze out as much income as they can from their customers, even if the practices are quite unfair. One of the most underhanded practices employed by banks is the provision of bounced-check protection, also referred to as a courtesy overdraft.

How It Works

A courtesy overdraft is provided by a bank when a customer doesn’t have enough money in his account to cover his expenses. Let us say, for instance that you have $200 remaining in your account and you wrote a check for $300. The additional $100 that you need will be provided by the bank so your check doesn’t bounce. You are extended financial help, you avoid paying a merchant’s returned check fee which ranges from $25 to $27 and you avoid the discomfiture brought on by a bounced check. Sounds good, right?

Wrong. Banks charge customers between $20 to $40 per transaction, so each time you carry out an overdraft you are charged a fee. If you don’t closely monitor your banking behavior, these fees can easily accumulate. Aside from transaction fees, some banks charge penalty fees for a negative balance – somewhere between $5 to $10 per day. So until such a time that you pay off the loan, every single day, the bank is charging you.

Banks enroll customers automatically in this plan. You are not given a chance to mull things over and you tend to make use of that service because it’s there and it sounds like a good offer. The overdraft limit can go as high as $1,000 and what’s more, some banks automatically credit this amount to your account thereby tempting you to spend money that you don’t have. With this plan, the bank has the option to reject a draft so protection isn't really guaranteed.

What You Can Do

Logic dictates that to prevent yourself from being caught in a situation where you will need an overdraft, you need to manage your finances wisely. But even the most frugal spender will, from time to time find himself in a bind. As an alternative, try to closely monitor your account and regularly check how much money you have left so you don’t inadvertently spend more than what your account can cover.

Call your bank to tell them you want the bounced-check protection plan eliminated from your account. Remember, this plan is automatic and unless you make that call, the bank will assume you want it and won’t remove your account from the plan.

Courtesy Overdraft versus Traditional Overdraft

If you absolutely must have overdraft protection, enroll in a traditional overdraft plan. While this plan will still present you with fees, it won’t be as exorbitant as the ones you’ll encounter in a courtesy overdraft. Additionally, a traditional overdraft involves a contract so the bank is mandated to cover your draft. If they fail to do so without justifiable reason, they may be held liable.