Traditionally, to discourage account holders from writing checks that they do not have money to cover, banks charged a Non-Sufficient Funds (NSF) fee and returned the check as unpaid.
Some banks and credit unions offer a service traditionally called “overdraft protection.” Account holders apply for this account and, if approved, have an agreement with the bank for a line of credit attached to their checking account to cover overdrafts. The account holder is charged interest on the amount of the overdraft for the time that the overdraft is outstanding. The interest rate charged is known in advance as part of the written agreement and cannot, by law, be more than 25%.
“Bounce protection” (sometimes called “overdraft privilege” or “bounce safe”) is different from traditional overdraft protection. Instead of bouncing a check the bank may decide to cover the check, for a fee, until the account is brought back to a positive balance. Unlike the rate that may be charged in connection with a traditional overdraft line of credit, the fees that may be charged are not regulated by law.
How Does It Work?
- Often account holders are provided with bounce protection without their knowledge and find out about the service only when they overdraw their account and are charged a fee.
- Bounce-protection usually sets a limit on the amount that a customer may overdraw their account and will cover ATM withdrawals, Debit Card use, online or phone payments, automated payments, etc. in addition to checks.
- Bounce protection is expensive: The bank will charge a flat fee, typically $20 - $30 and, in some cases, an additional daily fee (also known as a “sustained” or “extended” overdraft fee), until the account is brought back into balance.
- Overdrafts must be repaid or accounts brought to a positive balance within a set period of time, generally anywhere from a few days to 60 days.
What to Watch Out For:
- Not all banks allow customers to decline bounce protection.
- Bounce protection can, in some cases, encourage customers to overdraw their accounts, sometimes without even being aware of it. This is especially true at ATMs that include bounce protection in the amount available figure.
- For some account holders, bounce protection becomes a form of credit, turning a debit card into a credit card and ATM withdrawals into short-term, high-interest loans.
- Bank customers are not always given sufficient information regarding the actual cost of bounce protection, which can be EXTREMELY high, especially if a daily fee is imposed in addition to a one time flat fee.
- Some banks will allow consumers to exceed the limits placed on their accounts and don’t set limits how often a consumer can overdraw the account. For example, if you have overdrawn your account by $300 by writing one check for $100, withdrawing $100 from an ATM, and using a debit card to pay $100, you have made three transactions and may be charged three separate fees.
- Some banks include the bounce protection limit when providing account balances, providing a “cash available” figure rather than an actual account balance. This can cause you to overdraw an account without even realizing it. For example, if you have only $100 in a checking account, but you have a $200 bounce protection limit and do a balance inquiry by phone or ATM, some banks will tell you your balance is $300.
- Most plans require the overdraft and the fees be repaid within a certain amount of time. After that the account can go to collection or the bank will debit a percent of the amount due from the account on a regular basis (usually monthly) until it is repaid - even if the deposit is protected income, like a welfare check.
- Some banks will clear the largest check you have written first, causing a larger number of smaller checks to bounce than if the smallest checks were cleared first, with each smaller check then incurring a separate fee.
What You Can Do to Protect Yourself
- Contact your bank and find out if your checking account has automatic bounce protection. If you do not want this service, tell the bank that you are opting out. If your bank does not honor that request (not all banks permit a customer to opt out of the service), consider changing banks.
- If you feel you need protection from overdrawing your account, consider a traditional overdraft protection plan or ask about linking your savings to your checking account. It may be a better value and you will know in advance what the costs will be.
- Check your balance often by phone or on the internet. Make sure you always have enough money in your account to cover payments you make, including checks written, ATM withdrawals, Debit Card purchases, automated payments, telephone-initiated transfers, and internet transactions. If you have a smartphone, consider installing your bank's smartphone app.
- Make sure that your balance reflects money that is actually in your account and does not include the bounce protection limit. If you bounce a check, try to bring your account to balance as quickly as possible.
- Try not to think of bounce protection as a short term loan. If you need a loan, look for another, less expensive form of credit such as a small loan from a bank, a credit union (if you belong to one), a small loan company, a pay advance from your employer, or a loan from family or friends.
- If you are using bounce protection to pay bills, consider asking your creditors for more time instead. Find out what the penalties may be and compare them to the cost of using bounce protection.
If you have questions about banking or have a problem with a particular bank call the DFS at 1-877-BANK-NYS or file a complaint online.