Has this ever happened to you?

It's the day before payday, and you've only got a few bucks left in your bank account. You don't worry, though, because you've got "bounce protection" on your account, and you know you're getting paid tomorrow. You buy a sandwich for lunch, lattes for you and a coworker later on, and you stop off on the way home to get something to cook for dinner. Each time, you pay with your ATM card.

A few weeks later, you get your bank statement, and you're surprised to find that those purchases (which totaled maybe $25) ended up costing you well more than $100 -- thanks to fees of $30 or more on every charge, to pay for those little bounce protection loans.

What can you do? You can call and complain, and maybe they'll waive the fees "just this once" -- they often will, if the bank considers you a good customer. Or you can grumble to yourself and forget about it, like most people do. You did overdraw your account, after all, and the bank is just trying to deter you from doing it again.

Or are they?

Deterrent? Or profit center?
A new study by a group called the Center for Responsible Lending contends that the banks are looking at those fees as a source of profits. The report notes that banks are making a bundle off bounce protection programs -- $17.5 billion a year -- and contends that they are taking advantage of customer confusion and employing "abusive" practices to drive that income. Bounce protection fees differ significantly from traditional insufficient funds (NSF) charges, but are often confused by customers: the NSF fee covers the cost of returning a bounced check and may be genuinely intended as a deterrent; the bounce protection fee, on the other hand, is a loan fee -- often, a fee that is several times the amount of the loan. Given that these loans are almost always repaid within a few days, the size of the fees raises a lot of questions.

And those abusive practices? The Center, a nonpartisan advocacy group that fights what it calls "predatory lending," claims that these include:

  • Posting charges to your checking account right away while delaying the posting of deposits
  • Changing the order in which charges are debited to your account -- subtracting the biggest ones first -- in order to increase the number of charges that require bounce protection loans and
  • Failing to warn customers using an ATM card that they are about to overdraw their account

They further contend that companies marketing bounce protection software to banks do so by telling the banks that they will "double to quadruple their fee-income by implementing these loan programs." The report cites examples from major banks including Bank of America (NYSE:BAC), US Bancorp (NYSE:USB), and Wachovia (NYSE:WB) to support its claims; the group is currently lobbying Congress in support of a series of reforms.

What to do
Unless you've taken steps to enroll in an overdraft protection plan that sends overdraft charges to your credit card or other line of credit, you probably have bounce protection on your checking account. Most banks and credit unions offer it by default these days -- as we've seen, it's awfully profitable. But it doesn't offer you any benefits you can't get with a more typical overdraft protection plan, and if you live paycheck-to-paycheck it can put you in a deep debt hole very quickly. According to the report, the average fee is a whopping $34 per charge. Here's what to do:

  • Find out if you have it. This may take a little digging -- bounce protection plans are exempt from Truth in Lending laws, so details are probably buried in your bank's fee schedule. If in doubt, call and ask.
  • Opt out if you can. Not all banks will let you, but ask. But keep in mind that opting out will expose you to the risk of bouncing a check, unless you...
  • Set up overdraft protection with another account or line of credit. Most banks and credit unions allow you to link a savings account, credit card, or other line of credit with your checking account. Checking account overdrafts are simply charged to the other account, usually with no fee. You'll probably need to print, sign, and mail a form, but it should only take a few minutes -- and it could save you an awful lot of money.

Looking for more ideas to improve your finances? Check out the Motley Fool Green Light newsletter, where Fools Dayana Yochim and Shannon Zimmerman offer up hundreds of dollars of money-saving tips every month. Help yourself to their best ideas free for 30 days.

Fool contributor John Rosevear does not own any of the stocks mentioned in this article. Bank of America and US Bancorp are Income Investor recommendations. The Motley Fool's disclosure policy is always fair, always free, and never takes days off.