If you're going to overdraw your checking account by $100 or less, your most cost-effective bet is to borrow money from a payday lender, not to use an overdraft service or let your check bounce.

That's the conclusion drawn from a recent study, “The Best & Worst Places for Overdrawing,” conducted by Lake Bluff, Ill.-based research firm Moebs Services. The study, which surveyed 1,240 banks, 1,292 credit unions and 832 major retailers. including Wal-Mart, Home Depot, Walgreens and Safeway, reveals the most costly way to overdraw a checking account is through a bank or credit union that does not offer an overdraft service. In this case, the institution will charge a median nonsufficient funds fee of $28 and the retailer that received the bad check will charge a median price of $30, bringing the total damage to $58.

Large banks with $50 billion or more in assets charge a median overdraft price of $34 per check, and community banks and credit unions charge $25, Moebs said. But the median charge for a small loan of $100 or less is just $17.50 from payday lenders, which Moebs Services CEO Mike Moebs said. He added although payday lenders carry a stigma, they are used more often than one might think. Of the 34 million checking account users that rely on short-term finance, 19 million people, most of whom have a credit score of less than 600, use payday lenders while 15 million rely on overdrafts.

“The payday lender is the one driving the overdraft market, and very few in the credit union management market know that,” Moebs said.

In order to compete with payday lenders, Moebs recommends credit unions offer low-priced overdraft services and target members with low credit scores.

“If a credit union truly wanted to serve its entire potential membership, why not act like a payday lender?” Moebs said. “Credit unions should go after the members who choose not to open a checking account because they're afraid they will overdraw. If I were a credit union, I would get heavily into the overdraft business, go after the people with low FICO scores and lower my overdraft price.”

One credit union that understands the benefits of overdraft services is the $300 million City County CU of Fort Lauderdale based in Margate, Fla. Chris Oldag, executive vice president and chief operating officer, said approximately 70% of the CU's membership uses its overdraft service. He pointed out that without overdraft coverage, members could spur a detrimental chain of events due to a returned check for a mortgage payment, auto payment or rent, for example.

A returned check [could break a relationship with the provider of a regular service, like a day care or a landlord,” Oldag said. “Think of the cascading events that could occur if your returned rent check causes your landlord's house payment check to bounce. Overdrafts are a welcomed service.”

The study also found that 20.5% of banks and credit unions no longer provide overdraft services, and 40% of national retailers don't accept checks. Half of the consumers who overdraw their checking accounts do so by $40 or less, and 34 million consumers, or about 26% of consumer checking accounts, do this 10 or more times per year, Moebs said.

Moebs also examined regional overdraft fee differences. The firm determined that the least expensive place to overdraw a checking account is San Francisco, with a median price of $22.50. The most expensive location is Miami, with a median price of $30.95.

Instant Insights /

Moebs Study Urges CUs to Go Toe-to-Toe With Payday Lenders

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