Banks earn more money from debit card fees than credit card fees and they often manipulate usage patterns to maximize their profit – and our pain, says a front page story in today’s NY Times.
“Banks will let you overspend on your debit card in a way that is much, much more expensive than almost any credit card,” said Eric Halperin, director of the Washington office of the Center for Responsible Lending.
The problem is that banks charge you an overdraft fee when you spend more than what is in your account, instead of denying the purchase. Three-quarters of the largest American banks automatically give consumers overdraft coverage, excepting Citigroup and INGDirect.
By calling this service overdraft “protection,” banks emphasize the benefit to consumers (being able to spend more than you have), while de-emphasizing their gain (charging outrageous fees for lending you what you the moolah).
Regulators and lawmakers are working to help consumers, but in the meantime, ahem, here are seven things you can do to reduce your debit card fees, the story says.
- Call your bank and ask them to turn off the overdraft protection on card transactions. Ask if this step will also disallow checks, ATM withdrawals and automatic bill pays to go through if they take your balance below zero. These are additional ways you can incur fees.
- Create a cushion, be it $100, $500 or $1,000, if your bank does not let you turn off overdraft protection. Some, like Bank of America or Wells Fargo, “generally won’t let you switch” it off, the story says. My Mom used to keep $300 extra in her checking account that was not reflected in the balance on her check ledger. So when she went negative $15, say, she actually had $285 left.
- Find a new bank that allows you to NOT have overdraft coverage. Try a smaller bank or credit union, and be sure to ask more than one person at the new institution to make sure they don’t have overdraft coverage.
- Get a line of credit at your bank that will kick in if you go below zero, instead of overdraft coverage. With a bank line of credit you will pay an interest rate on whatever you borrow beyond zero, instead of a $30 or $35 fee whenever you dip below zero.
- Connect a back up savings account to your checking account. If you overspend, the bank will take money from your savings to make up the difference. PNC Bank’s Virtual Wallet lets you link two accounts to your main account, the story says.
- Set an alert so you know when your balance is getting low.
- Consider a credit card – if you weren’t running away from credit in the first place!
Read the whole story here.
September 9th, 2009 at 12:32 pm
For years, to protect against overdraft, I have “fudged” in my checkbook and enter in $500 fewer dollars than I’m actually entering in (so, say, my check was $1,500, I’d enter in $1000 only). Even though I remember that I did that, there’s something really powerful about seeing the “bottom line” of where the money went. Before I did this, I was a serial overdrafter! No longer!
September 10th, 2009 at 8:05 am
What a rip off! I thought debit cards would help me spend less, not more.
Banks haven’t changed at all, have they?
September 10th, 2009 at 10:02 am
Part of me wants to slap the bankers. Part of me wants to shake people and yell, “Check your balance before you buy a #!$@ coffee!”
Seriously: Someone in the story overdrafted because, among other things, he spent $4 and change on a coffee. Couldn’t people, um, keep better track of what they actually HAVE in the account — including whether or not that birthday check from Grandma has cleared yet — rather than assume it’s OK and wind up paying $39 and change for that coffee? Just a thought.
Debit cards won’t “help” us do anything. It’s up to us to be aware of what we actually have RIGHT NOW and spend within that limit.
September 10th, 2009 at 3:48 pm
This is an interesting topic since England has been dealing with this issue within their banking system for the last two years. Thousands of people made claims against their banks for these very illegitimately high overdraft fees. I believe the issue is still held up in the court system, but the hope was that new government regulations would be enacted to prevent banks from profiteering from these “unlawful” charges.
England differs from the US in that banks in England allow most of their patrons an “authorized overdraft” which in a way can be alikened to a “personal line of credit”. This gives people that little extra space if they happen to buy a coffee that sets their balance under zero without having to pay $35 for every charge that is allowed to go through when your balance is in the red.
September 11th, 2009 at 12:07 pm
[...] And ever since this NY Times article about debit cards hit the newsstands, there’s been a lot of talk about debit cards and their secret downsides – I really enjoyed Not Made of Money’s blog about protecting yourself when you use a debit card, Five Cent Nickel’s blog, The Dark Side of Debit Cards, and Bargain Babe’s analysis of how debit cards are designed to make banks money. [...]
September 12th, 2009 at 11:45 am
I never use my debit card, ever. What do I do you ask, I use CASH. I know exactly what I have to spend in my wallet, what a novel concept. Does it work? Heck yeah, no cash no purchase. In these tough times why pay the banks overdraft charges, or late fee’s. Take control of your money!
September 23rd, 2009 at 11:16 am
[...] my post about debit cards being a cash cow for banks? Well the NY Times story that inspired the post caused major change. The paper reports [...]
September 24th, 2009 at 12:23 pm
[...] my post about debit cards being a cash cow for banks? Well the NY Times story that inspired the post caused major change. The paper reports [...]
September 25th, 2009 at 8:16 am
[...] Debit cards are a cash cow for banks [...]