A courtesy overdraft is a discretionary payment made by banks when their customers overdraft their account via a paper check, electronic funds transfer (EFT), or the use of a debit card. When a bank extends a courtesy overdraft, it may add overdraft fees to each checking account overdraft and generally expect bank customers to repay the overdraft plus fees immediately or face additional fees or even account closure. The decision to issue a courtesy overdraft is entirely up to the bank, and there may be no real way for a bank customer to predict if or when a purchase, ATM withdrawal, or check will be honored if he does not have enough funds in his account.
In a traditional bank overdraft program, the bank customer is aware of the limit of her bank overdraft, as well as the terms of repaying the overdraft, which may allow for installment payments. Extra fees may be in the form of interest or an annual fee, but they are typically not charged per overdraft. Under a conventional overdraft program, a bank is generally obligated to honor overdrafts and is not able to pick and choose which charges or checks it declines. Courtesy overdraft programs, however, do not operate under these guidelines. The bank is not responsible for paying overdrafts and does not have to explain its decision-making process. The customer also faces more severe financial penalties for overdrafting her account.
Despite these extra costs, there are advantages to a courtesy overdraft program. Bouncing an important check, such as for the rent, can be extremely embarrassing for a bank customer and may have significant repercussions, such as eviction. Similarly, if a bank permits a customer to overdraft his account to pay a hotel or service station bill, the customer has a place to sleep and gas for his car. By covering these overdrafts, the bank protects its customer against severe hardship.
Critics of courtesy overdraft programs note that many users of debit cards believe that their card will automatically max out and decline a purchase or withdrawal if there are no funds in the account. As the customer continues to use the card, additional debt accrues, including late fees. If the customer is unable to pay what may be a significant balance, the bank may charge her additional, daily fees and threaten to close her account and send it to collections. These critics also note that courtesy overdrafts are unreliable, so users cannot judiciously take advantage of them when necessary, and that many bank customers are unaware that their bank has a policy of extending courtesy overdrafts and charging the program's high fees when customers open their accounts.