The Tangled Web of Debit Cards

Overdraft fees a cash cow for banks

0708_CONCreditCardI always thought that using a debit card for my purchases was a safe alternative to credit cards since the money is immediately taken out of my account. I mean, credit card debt aside, you can’t spend what you don’t have, right?

Wrong, according to a New York Times article this week that detailed the business of debit cards.

Apparently, debit card overdraft fees are big bucks for financial institutions. Banks raked in $27 billion by covering overdrafts on checking accounts, according to a 2008 survey by the FDIC. A $27 overdraft fee that a customer repays in two weeks on a $20 debit purchase would incur an annual percentage rate of 3,520%. By contrast, penalty interest rates on credit cards generally run about 30%, reports the Times.

The Center for Responsible Lending (CRL) has done its own investigation into debit card overdraft fees. The typical debit card transaction that spurs a $34 overdraft fee is for a $20 purchase, according to a 2008 CRL study. Thus, when a consumer is overdrawn, his debit card functions as an extremely high-cost credit card.

Rep. Carolyn Maloney (D-NY) proposed legislation back in March that would require consumer consent before banks can permit overdraft loans for a fee and prohibit banks from manipulating the sequence in which debits are cleared. But with the passage of the sweeping credit card legislation in May – which doesn’t include debit cards – Maloney told the Times, there would be too much pressure from banks making it difficult to pass the bill.

Michael Moebs, an economist who advises banks and credit unions, said Maloney’s legislation would effectively kill overdraft services, causing an estimated 1,000 banks and 2,000 credit unions to fold within two years. That is because 45% of the nation’s banks and credit unions collect more from overdraft services than they make in profits, he said.

How do you think overdraft fees should be overhauled? Should consumers take more responsibility for their finances or are banks to blame for the fees?

Renita Burns is the editorial assistant at BlackEnterprise.com.

ACROSS THE WEB
  • http://www.vinonagroup.biz andy johnson

    This was a very useful and informative piece of information. I think it’s alway better to have money saved somewhere so that when you need it, you can tap into it. I don’t think that debt card overdraft is a good idea, but sometimes, we do need this money so bad that we forget when your meney is running out. The best bet is to always have something to fall back on when you need to.
    I alway strive to make sure that my money keeps growing through investments and other means.. working and working for raining days.
    http://www.vinonagroup.biz
    http:www.vinonagroup.com

  • http://radfordemeson.blogspot.com haveyouheardyourselflately

    This practice is made possible largely because customers are often careless in monitoring thier accounts. You spend at least a third of your life earning your income, (often taking a lot of indignities in doing so) so why not spend another couple of hours planning your long-term financial future and your daily financial activity. I won’t say it is easy, but maybe if we slow down a little we would give the folks who pride themselves on being financial predators a little harder time in prying your hard earned income from our hands.

    Young adults, you should take heed of this, whilst $27 might not seem like much – racking up three of those charges a month, for a year amounts to $972 – what could you use that for?

    One should not adore money, but one should respect it. Keeping better records will help in reducing your NSF, overdrafts, and other fees that are the lifeblood of the financial systems. And slow down, don’t get too busy to look after your money, otherwise someone else will help you to it.

  • DGS

    Neglecting to monitor your money IS NOT AN EXCUSE FOR LEGALIZED RACKETEERING. Most REASONABLE people would agree there should be an over draft fee. But not 3,520% annually on $20.

  • http://striving-my.blogspot.com Striving

    I personally feel this situation is 2 fold. My past experience is that when I used a debit card the funds would not immediately deduct from my account meaning the bank would place the funds on hold however not removing the purchase amount from my available balance. This of course (at times) has caused me to overdraft. Once I learned the system I was more effective in managing my account because I don’t log every purchase. I think learning how your bank may operate when it comes to using debit is something that could serve to be very beneficial.

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