by Darla Dernovsek

If you're mortified by the thought of bouncing a check or worry about having access to funds in a pinch, then courtesy pay programs may be right for you.

But if you refuse to monitor your checking account balance, ignore the impact of fees on your budget, or have difficulty reining in your spending, linking courtesy pay privileges to your checking account could increase your costs and might even encourage a tendency to overspend.

Creating a 'last resort'

Courtesy pay programs, sometimes called "overdraft privilege" programs, are designed to serve as a last resort to save members from the embarrassment and high fees that accompany account overdrafts from check or debit card transactions.

When members enrolled in a courtesy pay program spend more than the amount in their account, the credit union covers the overdraft in exchange for a fee that usually falls between $20 and $30 for each item covered. Members typically have about 30 days to pay the overdraft and the related fees, with an overdraft limit often set at between $500 to $1,000.

Credit unions often restrict courtesy pay privileges to members who meet specific criteria, such as having paychecks deposited directly into their account and maintaining a checking account in good standing for 30 days or more.

Avoiding bounced check fees

Without courtesy pay, check or debit card purchases that pull an account's balance below zero would "bounce," or be returned to the accountholders' credit union. Financial institutions describe these as nonsufficient fund (NSF) items.

NSF items usually result in two fees: one charged by the financial institution and a second charged by the merchant. Each fee typically is in the range of $25 to $50 per event.

In contrast, courtesy pay programs charge only one fee per item, which the member pays to his or her credit union. Since the fee charged for a transaction covered by courtesy pay usually is about half the cost of the combined fees for an NSF transaction, it can be a good deal for the member.

How users become abusers

Unfortunately, some members use courtesy pay as a substitute for monitoring their account balances and spending within their means. When that occurs, courtesy pay users turn into courtesy pay abusers.

Courtesy pay abusers tend to write as many checks or make as many debit card transactions as they want, without paying attention to either their account balance or courtesy pay fees, according to Mary Ellen Buckley, vice president of operations at Westerly Community Credit Union, Westerly, R.I., and Marnie Nemcoff, vice president of marketing at Matadors Community Credit Union, Chatsworth, Calif.

Both credit unions monitor their courtesy pay programs to identify and educate abusers. Westerly also assists members who abuse courtesy pay with a "Fresh Start" program that spreads repayment of overdrafts and the related fees over four months.

To illustrate the cost of abuse, Nemcoff uses the example of a college student who paid a $21 courtesy pay fee each time he used a debit card to pay for about $7 in fast food. He did that several times over a period of a few months, pushing the cost of each burger-and-fries purchase to $28.

Buckley offers the example of a Westerly member with a $377 weekly paycheck who went to a local shopping mall on payday and spent more than $800. She incurred a courtesy pay fee of $25 for every transaction that wasn't covered by the original $377 deposit, or about $100 in fees.

"Some members become too reliant on courtesy pay," Nemcoff says. "They can rack up a lot of fees. Sometimes in a month, they may pay that fee four or five times. But they keep spending because they know the program won't allow them to bounce a check."

Are you an abuser?

Members who abuse courtesy pay services also may abuse checking privileges with NSF fees or other programs. You could be an overdraft abuser if you answer "yes" to any of these questions.

• Do you regularly write checks or make debit card transactions without knowing how much is in your account?

• Have you used a check or debit card for more than one purchase where the cost of the fee was higher than the cost of the item?

• Have you ever knowingly written a check or made a debit card transaction that resulted in a courtesy pay fee when you easily could have used a different approach? An example would be using online banking to transfer funds between savings and checking accounts to cover the cost of the transaction.

• Have overdrafts and fees dropped your checking account balance below zero for one pay period or longer?

• Has your payday deposit ever been too small to cover outstanding overdrafts and fees on your account?

Finding alternatives

Credit unions also offer other alternatives to help members avoid overdrafts. You can use these alternatives instead of courtesy pay, or combine them with courtesy pay in a plan that uses the alternative first, then kicks in with courtesy pay if you need another backup.

Alternatives include having money automatically transferred from your savings account, using a line of credit, or applying for a short-term loan.

Credit unions charge for these services, but the cost often is lower than paying multiple courtesy pay fees. For example, Matadors offers a short-term, no-interest payday advance loan that allows qualifying members to borrow up to $500 for a fee of $30.

Members also can monitor their account balances with online banking or when using an ATM (automated teller machine). ATM users typically get a special notice onscreen if a transaction will prompt a courtesy pay fee. That allows you to cancel or alter the transaction, as needed.

Paying attention

Occasional use of courtesy pay is appropriate for many people. Abusers are placed in a special category because they repeatedly pay high fees or overspend.

When abusers are unable to pay overdrafts and fees on time, they risk losing checking account privileges or being reported to systems that some businesses use to determine if individuals should be allowed to pay with a check.

Fortunately, using courtesy pay privileges appropriately usually is as simple as paying attention to your checking account balance, including monthly courtesy pay fees. By using courtesy pay privileges wisely, members can ensure they always have reasonably priced access to funds.

Courtesy pay can help you stay on track, but the best way to stay on top of your finances and prevent being overdrawn in the first place is to be aware of what you're spending--every day.

Published October 9, 2006