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

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

Large banks with $50 billion or more in assets charge a medianoverdraft price of $34 per check, and community banks and creditunions charge $25, Moebs said. But the median charge for a smallloan of $100 or less is just $17.50 from payday lenders, whichMoebs Services CEO Mike Moebs said. He added although paydaylenders carry a stigma, they are used more often than one mightthink. Of the 34 million checking account users that rely onshort-term finance, 19 million people, most of whom have a creditscore of less than 600, use payday lenders while 15 million rely onoverdrafts.

“The payday lender is the one driving the overdraft market, and veryfew in the credit union management market know that,” Moebssaid.

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

“If a credit union truly wanted to serve its entire potentialmembership, why not act like a payday lender?” Moebs said. “Creditunions should go after the members who choose not to open achecking account because they're afraid they will overdraw. If Iwere a credit union, I would get heavily into the overdraftbusiness, go after the people with low FICO scores and lower myoverdraft price.”

One credit union that understands the benefits of overdraftservices is the $300 million City County CU of Fort Lauderdale based in Margate, Fla. ChrisOldag, executive vice president and chief operating officer, saidapproximately 70% of the CU's membership uses its overdraftservice. He pointed out that without overdraft coverage, memberscould spur a detrimental chain of events due to a returned checkfor a mortgage payment, auto payment or rent, for example.

A returned check [could break a relationship with the providerof a regular service, like a day care or a landlord,” Oldag said.“Think of the cascading events that could occur if your returnedrent 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 nolonger provide overdraft services, and 40% of national retailersdon't accept checks. Half of the consumers who overdraw theirchecking accounts do so by $40 or less, and 34 million consumers,or about 26% of consumer checking accounts, do this 10 or moretimes per year, Moebs said.

Moebs also examined regional overdraft fee differences. The firmdetermined that the least expensive place to overdraw a checkingaccount is San Francisco, with a median price of $22.50. The mostexpensive location is Miami, with a median price of $30.95.