Beware “Courtesy” Overdraft Protection

In the past few years, many banks and credit unions have implemented a program called “Courtesy Overdraft Protection”. While that name sounds nice, it is simply another name for “High Priced Overdraft Loan”. Banks and some Credit Unions like this product because it enables them to get a significant boost in fee income while providing a so-called “service” to their customers.

Courtesy Overdraft Protection works like this. Banks or Credit Unions place their customers on the Courtesy Overdraft program, sometimes without their knowledge. If the customer writes a check that they don’t have funds to cover, the bank or credit union will cover the check temporarily. The bank or credit union will still assess a fee for insufficient funds to the customer but the check has been paid. The next deposit made by the customer will help to cover the short term loan.

Many customers like the concept of Courtesy Overdraft Protection. From their perspective, they’ve written a check that they don’t have funds to cover. The bank or credit union pays the check and assesses a “small” convenience fee. The customer’s creditor is none the wiser. Their bill has been paid and they don’t assess a separate fee to the customer for writing a bad check. In addition, there is no black mark on the customer’s credit report.

The banks or credit unions like the Courtesy Overdraft programs as well. From the financial institution’s perspective, they are making a number of low-risk, short-term loans and getting fee income each time they do it. Customers enrolled in these programs may be more likely to overdraft their accounts more frequently increasing the institution’s fee income even further.

Everyone wins….right? Wrong! If you do the math these short-term loans come at a very high price. For example, say you write a $500 check you can’t cover. The bank or credit union covers the check for you and charges a $35 fee. A week later, you get your paycheck and the loan is paid off. For the privilege of a $500 loan for one week, you pay $35. This equates to an interest rate of over 400%! Who in their right mind would take out a loan with a 400% interest rate? No one, that’s who. But this is one way banks continue to have record profits each year.

There is a better way. Check with your financial institution to see if you can have overdraft protection from your savings account. In that way, if you write a check without sufficient funds in your checking account, the money will come from your savings account instead. You may even be able to set up overdraft protection from your credit card. Yes, this would technically be a loan but it’s at a far lower interest rate that with the Courtesy Overdraft programs.