Protecting Yourself from Overdraft and Bounced-Check Fees

How do overdrafts and bounced checks happen?
When you write a check, withdraw money from an ATM, use your debit card to make a purchase, or make an automatic bill payment or other electronic payment for more than the amount in your checking account, you overdraw your account.

Your credit union has the option to pay the amount or not. If they pay, even though you don’t have the money in your account, you may be charged an "overdraft" fee. If your credit union returns your check without paying it, you may be charged a "bounced-check," or "nonsufficient funds" fee. And the person or company you wrote the check to—a store, landlord, or the phone company—may charge you a "returned-check" fee in addition to the fee your credit union charges you.

How can you avoid overdraft and bounced-check fees?
The best way to avoid overdraft and bounced-check fees is to manage your account so you don’t overdraw it.

Some simple steps include:

  • Keeping track of how much money you have in your account by logging on to online banking or using your mobile app.
  • Monitoring your ATM withdrawals, debit card purchases and online payments.
  • Using automatic bill pay systems to avoid missing payments.
  • Reviewing your account statements each month.

Sometimes mistakes happen
If you do overdraw your account, deposit money into the account as soon as possible to cover the overdraft amount plus any fees and daily charges from your credit union. Depositing money into your account can help you avoid additional overdrafts and fees.

What are "courtesy overdraft protection," or "bounce coverage" plans?
Many credit unions offer "courtesy overdraft protection" or "bounce coverage" plans so your checks do not bounce and your ATM and debit card transactions go through. With these plans, you’ll still pay an overdraft fee or a bounce coverage fee to the credit union for each item. But you will avoid the merchant’s returned-check fee and will stay in good standing with the people you do business with.

How much do courtesy overdraft protection, or bounce coverage, plans cost?
Plans vary, but most credit unions charge a flat fee (often $35) for each item they cover. And many set a dollar limit on the total amount your account may be overdrawn at any one time. For example, the credit union might cover overdrafts up to a total of $300, including all the fees.

Suppose you forgot that you had only $15 in your account and wrote a check for $25, used an ATM to get $40 cash, and used your debit card to buy $30 worth of groceries. In these 3 transactions you’ve spent a total of $95—and overdrawn your account by $80 ($95 - $15 = $80). How much will your forgetfulness cost you?

If you have a courtesy overdraft protection plan, your credit union may decide to cover all 3 transactions. And each of the 3 overdrafts will trigger a fee. You will owe your credit union the $80 that you spent even though it wasn’t in your account, plus the 3 overdraft fees. If your overdraft fee is $35 per overdraft, you will owe your credit union $185: $80 + $105 (3 x $35).

What are some other ways to cover overdrafts?
Credit unions may provide other ways of covering overdrafts that may be less expensive. Ask your credit union about these options before making your choice. You may be able to:

  • Link your checking account to a savings account you have with the credit union. If you overdraw your checking account, the credit union can transfer funds from your savings account to your checking account. Ask your credit union about transfer fees.
  • Set up an overdraft line of credit with the credit union. You need to apply for a "line of credit" just as you would apply for a regular loan. If you overdraw your account, the credit union will lend you the funds by using your line of credit to cover the overdraft. You will pay interest on this loan, and there may be an annual fee. But the overall costs may be less than the costs for courtesy overdraft protection plans.
  • Link your account to a credit card you have with the credit union. If you link your account to a credit card, any overdraft amount becomes a cash advance on your credit card. You will probably be charged a cash-advance fee, and interest charges on the advance will start immediately. The cost of this option depends on the interest rate on your credit card and how long you take to pay back the advance.

The choice is yours
Consider these ways to cover your overdrafts:

 Ways to cover your overdrafts      Example of possible cost for each overdraft*
 Good account management      $0
 Links to savings account      $5 transfer fee
 Overdraft line of credit      $15 annual fee + 12% APR
 Link to cash advance      $3 cash-advance fee + on credit card 18% APR
 Courtesy overdraft      $30 to $40 protection plan
 Bounced check      $60 to $80

*These costs are only examples. Ask your credit union about its fees.

What do you need to know about courtesy overdraft protection, or bounce coverage plans?

  • Avoid using these plans as short-term loans—they are costly forms of credit.
  • If you overdraw your account, get money back into your account as soon as possible. Remember that you need to put enough money back into your account to cover both the amount of your overdraft and any fees.
  • Even if you have one of these plans, there is no guarantee that your credit union will cover your checks, ATM withdrawals, and debit card and other electronic transactions that overdraw your account.
  • Good account management is the lowest-cost way to protect your hard-earned money. If you need overdraft protection every now and then, ask your credit union about the choices and services that are right for you.

What should you do if you have a problem or complaint about courtesy overdraft protection, or bounce coverage plans?
If you have a problem, first try to resolve it directly with your credit union. If you are unable to resolve the problem, you may want to file a complaint with one of the state or federal agencies responsible for enforcing consumer banking laws.

For more information regarding federally chartered credit unions contact:

National Credit Union Administration
Office of External Affairs
1775 Duke Street
Alexandria, VA 22314-3428
1 (703) 518-6330

For state-chartered credit unions, contact your state’s regulatory agency.