2003 Overdraft Protection Survey

 

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Overdraft protection is worth looking into

Bank service prevents bounced checks—often at little cost

A new Consumer Action (CA) survey of overdraft protection plans found 25 plans at 26 banks nationwide. This widely available banking option can be a cost-effective way to avoid bounced checks. However, some overdraft protection plans advance hundreds of dollars more than you need to cover bounced checks while others have hefty annual fees and per-day transfer charges.

It’s embarrassing and costly—not to mention illegal—to bounce a check. Bounced check and returned check fees can cost you $60 or more for a single check.

Many banks and credit unions offer overdraft protection, which allows you to write checks for more money than you have in your account. If you overdraw your checking account, the bank will loan you money—or transfer money from your savings account—to cover the check. You are charged fees and, if applicable, interest when you use overdraft protection.

“The overdraft protection plans we found with no annual fees and no transaction fees are very cost-effective when compared to the price of even one bounced check, not to mention returned check charges from the company you wrote the check to,” said Ken McEldowney, CA executive director. “No one should write checks when the money’s not there, but everyone has occasional cash flow problems and accidents can happen.”

CA’s survey, conducted during March and April 2003 by Sarah Hinds, Janice Kohn and Linda Sherry, can be found in this article. 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 $14 for each of the first three annual bounced checks at Bank of America to the $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. Only four of the 26 banks surveyed cap the number of bounced check. Wells Fargo charges for a maximum of 10 bounced checks each day; Bank of America, Comerica Bank and Washington Mutual Bank charge only for the first five checks in the same day.

“While a daily limit on bounced check fees seems like a consumer friendly policy, allowing 5 to 10 checks to bounce at a cost of $150 to $300 before capping the fee is a pretty flimsy protection,” said Sherry, CA’s editorial director.

CA’s survey looked at the three most common types of overdraft protection:

  • 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.
  • 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 of $3 (HSBC) to $10 (PNC Bank and Wells Fargo Bank).
  • 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.

How much?

On lines of credit, two banks (TCF Bank and Wells Fargo Bank) give you a minimum of $300, no matter what the amount of the overdraft. 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, 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.

Payback time

Just depositing more money in your checking account does not wipe the overdraft slate clean. “You have to pay back the overdraft specifically,” said CA’s Linda Sherry, who led the survey team. “The bank won’t do it for you.”

“With credit-based overdraft protection, the trick is to pay the overdraft as quickly as possible,” said Sherry. “The banks will let you take as long as you want to pay it back in full, but you’ll be expected to make a monthly minimum payment.” Many banks automatically deduct the minimum payment from your checking account if you don’t make a payment by the due date.

Sherry recommended paying the overdraft back in full within seven days if possible to get the greatest savings. (See “Can overdraft protection save you money?”)

Transfer fees

Transfer fees are charged each day you trigger overdraft protection. If you bounce checks on subsequent days, resulting in overdraft protection advances or transfers, you will be charged a fee on each day the advances or transfers are necessary.

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 banks that offer this 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 19 (42%) banks offering an overdraft protection with a line of credit charge transfer fees, with a range of $3-$10 per day.

“With annual fees and transfer fees, overdraft protection costs start to add up,” noted Sherry. “The good news is that we found four banks—Bank of New York, Chase, TCF Bank and U.S. Bank—offering overdraft lines of credit without these charges.”

Overdraft protection: Get all the details

Consumer Action recommends that you get answers to the following questions before deciding to sign up for overdraft protection:

What is the interest rate?
Surveyed banks charged from 7.50% percent to 21.90% for overdraft advances.

What is the transaction charge?
Some financial institutions charge a fee for each transaction in addition to regular interest rates. CA’s survey found that overdraft lines of credit are the least likely form of protection to have transfer fees.

What is the advance amount?
Overdraft advances vary by bank—some give you the exact amount, others advance cash in multiples of up to $300 while still others advance a set minimum ($50 to $300), even if it’s more than you need. If the bank loans only in multiples of $300, you would have to borrow $300 (and pay interest on it) even though you need only a few dollars to cover an overdraft.

What is the annual or monthly fee?
There might be a monthly fee in addition to interest. Annual fees range from $5 to $50. A very few banks assess a monthly charge for overdraft protection.

How does paying off the overdraft work?
Ask how you can repay the loan in the most timely way. An ATM or online transfer is the most timely and convenient way to repay an overdraft loan but most banks will accept a check in the mail or at a local branch. Ask if a minimum payment will be deducted automatically from your checking account if you haven’t made a payment on the outstanding balance by the due date.

Can overdraft protection save you money?

To gauge the potential savings of overdraft protection, we used the example of a bank customer who bounced three checks in one day totaling $125. This was the only instance in the year. Without overdraft protection, the customer would be liable for three separate bounced check fees on the day the checks bounced. Under the terms of the overdraft protection plans surveyed in this issue, Consumer Action found significant savings when compared to the cost of bounced checks. This chart shows the range of possible savings using three kinds of commonly available protections. The examples on this chart assume that all advances were paid back along with any interest after seven days. (All interest charges are approximate. Credit-based overdraft protection may carry a minimum monthly finance charge.)

Fees Saved By Using Overdraft Protection Bank Amount Transferred to Cover Overdraft Overdraft Protection Charges Bounced Check Charges Avoided
 
Overdraft protection linked to a credit card
$86.50
First Union/Wachovia $200 50¢
(No annual fee. No transfer fee. Seven days' interest
@12.99% APR=50¢.)
$87
(3 checks @.
$29 each.)
$82.52 Wells Fargo Exact amount $10.48
(No annual fee. $10 transfer fee. Seven days' interest @19.99% APR=48¢.)
$93
(3 checks @.
$31 each.)
Overdraft protection line of credit
$89.71
Bank of NY Exact amount 29¢
(No annual fee. No transfer fee. Seven days' interest @12.00% APR=29¢.)
$90
(3 checks @.
$30 each.)
$31.50 Union Planters Exact amount $55.50
($50 annual fee.
$5 transfer fee. Seven days' interest @21.00% APR=50¢.)
$87 (3 checks @.
$29 each.)
Overdraft protection linked to a savings account
$79-$100
U.S Bank Exact amount $5
(No annual fee. $5 transfer fee. No finance charge.)
$84-$105 (Fees varies by state from $28-$35.)
$37 Bank of America Exact amount plus $25 $5 (No annual fee. $5 transfer fee. No finance charge.) $42 ($14 each for the first 3 checks that bounce each year.)


Consumer Action Overdraft Protection Survey - 2003

Bank Credit Card Savings Line of Credit Bounced check fee
Amtrust/Ohio Savings 888-268-7878 www.ohiosavings.com Not offered Not offered $20 annual fee. No transfer fee. APR:18.00%(F). Funds advanced in multiples of $100. $30
Bank of America 800-792-0808 www.bankofamerica.com No annual fee. $5 transfer fee. APR: 19.80% (V) (Prime + 12.99%). Funds are advanced in multiples of $100. No annual fee. $5 transfer fee. Exact amount is transferred, plus $25 cushion. Not offered $14 (for 1-3 bounced checks in 12 months), $28 (4-5 in 12 months) or $32 (6+ in 12 months). Customers are charged for maximum of five checks per day.
Bank of New York 800-225-5269 www.bankofny.com Not offered Not offered No annual fee. No transfer fee. APR: 12.00% (V) (Prime+7.75%). Funds advanced in exact amount. $30
Bank One 888-963-1111 www.bankone.com No annual fee. $5 transfer fee. APR: 13.90% (F). Funds advanced in multiples of $50. No annual fee. $5 transfer fee. Funds are transferred in exact amount. No annual fee. $5 transfer fee. APR: 13.90% (F). Funds advanced in multiples of $50. $29
BB&T Bank 800-226-5228 www.bbandt.com Not offered $10 annual fee. $5 transfer fee. Funds are transferred in multiples of $100. $10 annual fee. $5 transfer fee. APR: 18.00% (F). Funds advanced in multiples of $100. $30
Chase Manhattan Bank 800-242-7324 www.chase.com Not offered No annual fee. $3 for each check paid with transferred funds. Funds are transferred in exact amount. No annual fee. No transfer fee. APR:19.90%-21.90% (F). Funds advanced in exact amount. $30
Citibank 800-374-9700 www.citi.com Not offered No annual fee. $5 transfer fee. Funds are transferred in exact amount. $5 annual fee (except NY). No transfer fee. APR: 15.75% (V) (Prime + 11.50%). NY: 16.25% (V) (Prime + 12.00%). Funds advanced in exact amount. $30
Citizen’s Bank 800-272-9300 www.citizensbank.com Not offered $3 monthly fee. No transfer fee. Funds are transferred in exact amount. $20 annual fee. No transfer fee. APR: 18.00% (F). Funds advanced in exact amount. $26
Comerica Bank 800-522-2265 www.comerica.com No annual fee. $5 transfer fee ($6 if used more than six times per quarter). APR: 13.99% (F). Funds advanced in multiples of $100. No annual fee. $6 transfer fee ($7 if used more than six times per quarter.) Funds are transferred in exact amount. Not offered. $18 for checks paid at the bank’s discretion; $15 for checks that bounce (i.e. are returned to the payee). Daily maximum fee on paid checks is $95; on bounced checks it is $75 per day.
Fifth Third Bank 800-457-0842 www.53.com No annual fee. $7 transfer fee, plus cash advance fee of 3.5% ($5 mininum). APR: 19.99% (V) (Prime + 10.99%). Funds advanced in multiples of $50. No annual fee. $6 transfer fee. Funds are transferred in exact amount. Not offered. $29. If overdraft causes a negative balance, a fee of $6 per day is charged until the balance is positive.
Fleet Bank 800-225-5353 www.fleet.com Not offered No annual fee. $5 transfer fee. Funds are transferred in exact amount. $25 annual fee. No transfer fee. APR: 18.00% (F). Funds advanced in exact amount. $22-$25 for returned checks. (Varies by state.) $30 for overdrafts paid by the bank as a courtesy.
HSBC 800-975-4722 www.hsbc.com No annual fee. $3 transfer fee. APR: 13.65% (V) (Prime + 9.90%). Funds advanced in exact amount. Not offered No annual fee. $3 transfer fee. APR: 18.00% (F). Funds advanced in exact amount. $28
KeyBank 800-539-2968 www.keybank.com Not offered Not offered $25 annual fee. No transfer fee. APR: 13.75% (V) (Prime + 9.50%). Funds advanced in exact amount. $29.50
First Union/Wachovia Bank 800-416-3664 www.wachovia.com No annual fee. No transfer fee. APR: 12.99% (F). Funds advanced in multiples of $100. No annual fee. $5 transfer fee. Funds are transferred in exact amount. Not offered. $29
National City Bank 800-738-3888 www.nationalcity.com Not offered Not offered $2 monthly fee. No transfer fee. APR: 17.81% to 19.80% (F). Funds advanced in multiples of $50. $26-$29 (fee varies by state)
PNC Bank 888-762-0332 www.pncbank.com Not offered No annual fee. $10 transfer fee. Minimum of $50 is transferred; above $50, exact amount. $15 annual fee. $10 transfer fee. APR: 12.75% (V) (Prime + 8.50%). Minimum of $50 is advanced; above $50, exact amount. $30
Regions Bank 800-734-4667 www.regionsbank.com Not offered No annual fee. $5 transfer fee. Funds are transferred in multiples of $100. Not offered. $29
Riggs Bank 800-368-5800 www.riggsbank.com Not offered No annual fee. $5 transfer fee. Funds transferred in multiples of $100. $25 annual fee. No transfer fee. APR: 18.00%-19.90% (F). Funds advanced in multiples of $100. $31
SouthTrust Bank 800-225-5782 www.southtrust.com Not offered No annual fee. $5 transfer fee. Funds transferred in multiples of $100. $30 annual fee. $5 transfer fee. APR: 18.00% (F). Funds advanced in multiples of $100. $30
SunTrust Bank 800-786-8787 www.suntrust.com No annual fee. $10 transfer fee. APR: 8.99-12.99% (F). Funds advanced in multiples of $100. No annual fee. $10 transfer fee. Funds transferred in multiples of $100. Not offered. $30
TCF Bank 866-823-2265 www.tcfexpress.com Not offered Not offered No annual fee. No transfer fee. APR: 18.00% (F). Funds advanced in multiples of $300. $30
U.S. Bank 800-872-2657 www.usbank.com Not offered No annual fee. $5 transfer fee. Funds are transferred in exact amount. No annual fee. No transfer fee. APR: 18.00%-21.90% (F). Funds advanced in multiples of $200. $28-$35 (fee varies by state.)
Union Planters Bank 800-860-9971 www.unionplanters.com Not offered Not available at all branches. No annual fee. $5 transfer fee. Funds are transferred in exact amount. $50 annual fee. $5 transfer fee. APR: 21.00% (F). Funds are advanced in exact amount. $29
Washington Mutual Bank 800-788-7000 www.wamu.com Not offered No annual fee. $10 transfer fee. Exact amount is transferred, plus $25 cushion. $10 annual fee. $5 transfer fee. APR: 18.00% (F). Exact amount is transferred, plus $25 cushion. $21-$30 (fee varies by state). Customers are charged for maximum of five checks per day.
Wells Fargo Bank 800-869-3557 www.wellsfargo.com No annual fee. $10 per-day transfer fee. APR: 19.99% (V) (Prime + 15.24%). Funds are advanced in the exact amount. Not available on all accounts. No annual fee. $10 transfer fee. Funds are transferred in exact amount. $25 annual fee. $10 transfer fee. APR: 7.50%-14.24% (V) (Prime + 3.25%-9.99%). Minimum of $300 is advanced; above $300, exact amount. $18-$31 (fee varies by state.) In most states, customers are charged for maximum of 10 checks per day.


Key to Overdraft Protection Survey Chart
APR (annual percentage rate): The finance charge—figured as a percentage of the amount owed—expressed in terms of an annual figure.
Bounced check fee: This is the amount banks charge you each time you bounce a check. You may also be charged a returned check fee by the party you wrote the check to.
Credit card: The bank links your checking account to your credit card and automatically charges a cash advance to your card when needed to cover checking overdrafts.
Line of credit: Unsecured loans, in which the bank agrees to lend you up to a specific amount and to allow you to borrow from the line of credit again once you’ve repaid all or part of the loan.
Savings: The bank links your checking account to your savings account and transfers money when needed to cover checking overdrafts.
Transfer fee: The amount, if any, that banks charge to transfer or advance you money to cover a bounced check.


Where you can find the banks in the survey
Amtrust/Ohio Savings Bank: Online banking is available nationwide. Branches in AZ, FL, OH

Bank of America: Online banking is available nationwide. Branches in AZ, AR, CA, DC, FL, GA, ID, IL, IA, KS, MD, MO, NV, NM, NC, OK, OR, SC, TN, TX, VA, WA

Bank of New York: CT, NJ, NY

Bank One: Online banking is available nationwide. Branches in AZ, CO, FL, IL, IN, KY, LA, MI, OH, OK, TX, UT, WI, WV

BB&T Bank: AL, DC, FL, GA, IN, KY, MD, NC, SC, TN, WA, WV

Chase: Nationwide

Citibank: Nationwide

Citizen’s Bank: CT, DE, MA, NH, NJ, PA, RI

Comerica Bank: CA, FL, MI, TX

Fifth Third Bank: ID, IL, KY, MI, OH, TN, VA

First Union/Wachovia Bank: CT, DE, FL, GA, NC, NJ, NY, PA, SC, VA

Fleet Bank: CT, FL, MA, MN, NH, NJ, NY, PA, RI

HSBC: Nationwide

KeyBank: AK, CO, ID, IN, ME, MI, NY, OH, OR, UT, VT, WA
National City Bank: IL, IN, KY, MI, OH, PA

PNC Bank: DE, IN, KY, NJ, OH, PA

Regions Bank: AL, AR, FL, GA, LA, NC, SC, TN, TX

Riggs Bank: DC, MD, VA

SouthTrust Bank: AL, FL, GA, MS, NC, SC, TN, TX, VA

SunTrust Bank: FL, GA, MD, TN, VA

TCF Bank: CO, IL, MI, MN, WI

U.S. Bank: Services are not available in CO, FL, GA, MI, OK, TX, VA

Union Federal Savings: Indiana

Union Planters Bank: AL, AR, FL, IA, IL, IN, KY, MO, TN, TX

Washington Mutual Bank: AZ, CA, CO, FL, GA, ID, NJ, NV, NY, OR, TX, UT, WA

Wells Fargo Bank: AL, AZ, CA, CO, IA, ID, IL, IN, MI, MN, MO, NB, ND, NM, NV, OH, OR, SD, TX, UT, WA, WI, WY

Steer clear of bank privilege called ‘bounce protection’

A new banking service called bounce protection has consumer advocates on red alert. The service getting all the negative attention is not traditional overdraft protection—in which customers arrange to have bounced checks covered by a cash advance or transfer from savings—nor is it the occasional courtesy of bank officers to cover a check for favored customers. Instead, the Consumer Federation of America (CFA) and the National Consumer Law Center (NCLC) charge that bounce protection is a “deliberate attempt to hook consumers into overdrafts as a form of high cost credit.”

Consumer Action’s Overdraft Protection Survey found four of the 26 banks surveyed have bounce protection: Fifth Third Bank, TCF, Union Federal Savings Bank and Washington Mutual Bank. (See 'Bounce protection' chart below.) CA looked at major regional banks nationwide—many smaller banks automatically include bounce protection with their checking accounts.

“Bounce protection plans are designed to boost bank income by encouraging customers to overdraw their accounts,” said Jean Ann Fox of CFA. “It’s payday lending done by banks, but without cost disclosures.”

Traditional overdraft protection is an optional service that requires permission from account holders, who must apply for a line of credit or purposely link their checking accounts to a credit card or savings account. Bounce protection is an automatic service attached to the checking accounts of certain customers. It is communicated as a “courtesy” and customers who don’t want it must contact the bank to have it removed.

Bounce protection has several less than desirable features:

  • Customers do not sign up for the plan—some do not even realize it’s part of their accounts.
  • Because a “limit” of several hundred dollars is added to the available balance, customers may be fooled into thinking they have money in their accounts when they don’t.
  • When an overdraft occurs, customers are liable for bounced check fees. Unlike traditional overdraft protection, which keeps checks from bouncing and therefore avoids fees, bounce protection allows the bank to collect the fee anyway.
  • In addition to bounced check fees, bounce protection customers might pay a fee of up to $6 each day their account balances remain in the red.
  • Banks deduct the amount owed plus fees from the next deposit. CFA and the NCLC found that this can occur even if the deposit is protected income such as welfare or Social Security benefits.
  • Banks are not required to provide customers with federal Truth in Lending disclosures.
  • Bounce protection is triggered not only by checks, but by ATM withdrawals and debit cards transactions, which allow customers to overdraw their accounts, sometimes even beyond the “limit” set by the bank.

CFA and the NCLC provided an example of a $100 overdraft with a $20 bounced check fee, a low fee by industry standards. If the consumer pays the overdraft back in 30 days, the annual percentage rate (APR) is 243%. With daily fees and a higher bounced check charge the effective interest rate could easily be much higher.

Money-making potential

According to CFA and the NCLC, banks generally do not develop bounce protection services on their own. Instead, “a handful of bank consultants are responsible for the plans, marketing them to thousands of banks.” These consultants promote the service by emphasizing the money-making potential of bounce protection.

In January, CFA and the NCLC, along with Consumers Union, the National Association of Consumer Advocates and the Public Interest Research Group, submitted comments on bounce protection products to the Federal Reserve Board, asking that it:

  • Require that bounce protection fees be subject to Truth in Lending disclosure requirements.
  • Require notification at ATMs if the available balance includes an overdraft limit.
  • Prohibit the advertisement of any service which encourages consumers to overdraw their accounts.
  • Allow consumers to choose bounce protection—not to impose it on customers without their consent.
  • Stop banks from seizing exempt funds, such as welfare and Social Security benefits, to pay bounce protection fees and overdrafts.

‘Bounce protection’ is a costly privilege

Consumer Action’s Overdraft Protection Survey of 26 banks found four banks that provide automatic “bounce protection privileges” on checking accounts. This chart compares bounce protection terms at the banks. (See accompanying story for more information.) For the locations of these banks, see Banks in Survey.

Bank Overdraft allowance Bounced check* fees Daily cap on bounced check fees Negative balance fee Time to repay
Fifth Third Bank Usually $500 $29 None $6 per day 30 days
TCF Bank $500 $30 None None 30 days
Union Federal Savings Bank $500-$800 $29 None None 30 days
Washington Mutual Bank $100 $21-$30 (Varies by state) None None 10 days
* Applies not only to checks, but to ATM withdrawals, debit card transactions and preauthorized withdrawals or payments if made without sufficient funds in the account.
 

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