By Michelle Singletary
Thursday, July 19, 2007
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.
She added: "Careful tracking by the customer of transactions is an important responsibility. It is even more critical today than ever before, as there are many new and convenient ways to pay for the goods and services we buy."
Feddis said it's customers' responsibility to keep track of their money because they are in a better position to know their actual balance. Only they know about the most recent automatic payments they have authorized and debit card transactions they have approved.
Still, why won't the institutions warn customers about possible overdrafts? "Current technology makes real-time notification of overdrafts cost-prohibitive," Feddis said.
Interpreted another way: Financial institutions don't want to change the status quo because they make good and easy money off their own customers' mistakes and irresponsibility.
The fact is, Halperin said, that the technology exists and should be installed to deny a transaction if there isn't enough money in a person's account.
I agree with the center that at the very least, consumers should be warned they don't have sufficient funds for a particular purchase. So what if they're embarrassed or inconvenienced? It sure beats getting stung by a string of overdraft fees. If they choose to go forward with the transaction, then they can't complain about the financial consequences.
On this issue, everyone should be held accountable. Consumers have many ways to check how much they have in their accounts before using their debit cards, including going online or using their bank's automated phone system to get an update. To cover themselves when mistakes happen, they can link their checking account to a source of backup funds -- a savings account or line of credit. Or they could just opt out of having overdraft protection.
And financial institutions should restrain their fee frenzy and stop routinely allowing consumers to withdraw funds that exceed their account levels, only to slam them with overdraft charges.
· On the air: Michelle Singletary discusses personal finance Tuesdays on NPR's "Day to Day" program and online athttp://www.npr.org.
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