The Tangled Web of Debit Cards

I 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