Tuesday, January 8

The Promise and Pitfalls of Courtesy Pay

Does your financial institution offer a product that will honor a check that you have written, even if it overdraws your account? This service is commonly referred to as Courtesy Pay or Overdraft Protection. How does it work? Is it for you? Let's take a look at how it works.

Now that you're all done shopping at the grocery store, you're at the check out and whip out your checkbook or check card or debit card to pay for the purchase. You write or swipe and you're on your way. What if there wasn't enough money in the account? What will happen to the check? Will it be returned? If there wasn't enough money in the account, why did it accept my check or debit card? Because you have Courtesy Pay!

Courtesy Pay isn't a loan; instead you pay a flat fee as opposed to daily interest, in other words, it isn't an overdraft line of credit. In my experience, Courtesy Pay is more expensive than an overdraft line of credit. The fees can range from very little to quite a lot! One local institution charges an initial fee of $29 per returned item. More on that in a minute...

The bank or credit union who offers this product does so under no obligation. This means that it is discretionary. If they feel you are abusing the privilege, or if it is not in your best interest, they may revoke it.

The institution decides what the maximum amount per account will be honored if the account is overdrawn. Let's say that the institution has determined that they will honor up to $750 overdraft protection, or as a Courtesy, pay the check or debit on your behalf up to $750. For this service, they charge you a fee. They expect, and a condition of continued protection, that you will bring the account to at least a zero balance within a certain number of days. Courtesy pay will honor your check, draft, or debit, even if your account does not have ample funds available to pay the item in full.

Is it for you? That really depends. If you occasionally make an error in your checkbook, then maybe it is for you. Courtesy Pay saves you the embarrassment of having an item returned to a merchant, and it saves you the expense of 'non sufficient funds' and returned check fees. In our marketplace, a returned check will cost $25, and the NSF fee averages $30, so this could be a $55 mistake.

What if you regularly make mistakes in your checkbook, or what if you're running short on cash? What if you used to play the check 'float'? If this is the case, you should really consider whether or not you really want this type of service. Why wouldn't you want this service? Good question. Let me explain.

Let's say that you write a check for $250, but there is only $225 in your account. You had made a mistake in your math, or forgot to enter a transaction because according to your records you had $400 in the account. You have courtesy pay so your bank or credit union honors the check and tacks another $29 (the courtesy pay fee) to your account. Now, you're $54 overdrawn in your account.

But wait, you're not done writing checks yet! You write another check, this time to the grocer, for $100. But, there isn't $100 in the account. The check is honored by your bank, they add the $100 plus the $29 fee to your account. Now, you're $183 overdrawn in your account when, according to your checkbook, you think that you have $75 left in the account. Now, off to the gas station.

You pump $60 of fuel in the car, use your debit card to pay, the transaction is processed. Your account is charged the $30 plus another $29 for the fee. Balance in your checkbook says $15, balance at the bank is negative $272.

On your way back home, you stop and pick up a few last minute items, use your debit card to pay for the $10 purchase... $39 more added to your negative balance. Your checkbook register shows a $5 balance until your next deposit (maybe you have the deposit all ready to go, just waiting to deposit it tomorrow), when the actual balance THAT YOU NOW OWE is $311!

As you can see, a one time fee of $29 isn't such a bad deal, but overdraw just a few items (some institutions will even honor withdrawals at ATM machines that overdraw your account!) and the fee can quickly surpass $100. Now, what if you didn't have courtesy pay and instead bounced 4 checks around town? Courtesy pay would still be less expensive than paying the NSF fee and returned check charges, say nothing about the humiliation and risk that the merchant no longer accepts checks from you. I guess Courtesy Pay is the lesser of the two evils.... but you know what they say; the lesser of the two is still evil!

My vote: pass on the courtesy pay and overdraft protection programs. If you feel more secure having this type of protection, look for an overdraft line of credit instead. You'll need to meet credit requirements, but in the long run, this can be MUCH less expensive and it will save the embarrassment and costs associated with bouncing a check.