Bounced protection, sometimes known as courtesy overdraft, may sound like a great thing to have with your checking account. Essentially, bounced protection plans allow a consumer to pay a fee to have any check that is written over the amount in your account clear without issue. The plan keeps consumers from bouncing checks thus the plan name.
However, it may seem great to have such protection to save your from embarrassment and additional financial strains, bounced protection can also mean big trouble to those who misuse the service. For instance, a consumer who knows they can not bounce a check may be more than willing to write checks they can not cash, figuring they only have to pay a fee to be in the clear. However, it is those fees that will add up fast, leaving you owing much more money than you likely have. You end up owing the bank bank all of the cash plus fees within a 2-4 week period.
Bounced protection is different than overdraft protection in several ways. First, many customers end up automatically having the service provided to them unless they chose to opt out. So, you make one miscalculation and end up paying back more than you bargained for when initially writing the check. Bounced protection also differs in that banks do get to choose which checks are cleared by bounced protection. Not all banks will clear all overdrawn checks, whereas with overdraft protection the customer and the bank sign a contract to cover all eligible checks.
Also, overdraft protection typically charges a low annual fee and adds interest on all balances owned. With bounced check protection plans, the fees can be astronomical in comparison, sometimes as much as $40 a piece, somewhat similar to what payday lenders charge for a loan. Banks essentially count on the fact that some consumers will not be able to pay back the balance owed in time and therefore they get to collect on higher fees on balances owed. Banks are also not required to disclose the interest rates of their bounced check protection plans, unlike payday lenders.
Another interesting note is that banks actually have a bit of control over whether or not you will bounce a check. Traditionally, they process checks by size, from largest to smallest. The reason for the order is because you are likely spending the most money on the most important things. Some financial experts feel banks really do this to capitalize on the larger number of smaller checks that will bounce once a big payment has cleared the account.
Talk to your bank about bounced protection and make sure you opt out of it if you can. If you are interested in the program, at least take the steps necessary to understand exactly what happens, how much it costs, and how it works. Consider the more traditional overdraft protection plans instead to save some money and prevent temptations.