They Want You to Go Over Your Debit Limit

(Tom Allen - Twp)

One of the biggest selling points for debit cards has been that you can't spend more than you have in your bank account, making them a good alternative to racking up debt on a credit card.

The sales pitch has worked. Consumers now make one-third of their in-store purchases with debit cards -- up from 21 percent six years ago, according to the American Bankers Association, an industry trade group.

But as many users have discovered, the debit card has the same problem as its credit card cousin -- you can spend over your limit, causing yourself all kinds of financial havoc.

Banks will approve a check or debit transaction when the account has insufficient funds but will also charge the customer a fee. The practice is an intentional effort to drive up revenue, according to a new study by the Center for Responsible Lending, a nonprofit, nonpartisan research and policy organization.

"Banks should protect customers' funds, not plunder them with high fees and harmful practices," said Eric Halperin, director of the center's Washington office.

Earlier this year, the center published a report that found that debit card purchases at point-of-sale terminals and withdrawals at ATMs triggered 46 percent of overdrafts. The rate for paper checks was 27 percent of overdrafts.

In the center's most recent report, "Out of Balance," the consumer-advocacy group found that debit cards are the largest source of account overdraft fees for banks and credit unions. Debit card point-of-sale and ATM overdrafts cost consumers $7.8 billion in 2006, which represented 45 percent of the $17.5 billion the financial institutions received in overdraft fees.

Many banks and credit unions automatically enroll customers for overdraft protection programs when they open a checking account, according to the center. When an overdraft occurs, the financial institution will automatically advance the funds. But for the privilege of a short-term loan to cover the shortfall, the customer is charged $34 on average, according to center data. The fee kicks in even if the overdraft is for a few dollars.

In hopes of reducing overdraft fees charged to consumers, the center is supporting legislation (H.R. 946) sponsored by Democratic Reps. Carolyn B. Maloney (N.Y.) and Barney Frank (Mass.) that would, among other things, require banks and credit unions to warn their customers before authorizing an electronic overdraft. The House recently held a hearing on the legislation.

"I've always said that banks have the right to make money for what can be a valuable service, but consumers also have a right to information they need to make an informed decision," said Maloney, chairwoman of the House financial institutions subcommittee.

Bankers argue that overdraft protection is something consumers not only want but also need, considering many do overdraw their checking accounts.

"It helps to avoid embarrassment, inconvenience, merchant fees and other adverse consequences of having a check bounce or a transaction denied," said Nessa Feddis, senior federal counsel for the bankers association, in recent testimony before a House subcommittee.