MISSING MONEY? WHY DEBIT CARDS ARE DANGEROUS
Q: WHAT HAPPENED TO THE DEBIT CARD AS A SMART, SAFE FINANCIAL TOOL?
A: THE BANKS PULLED A BAIT AND SWITCH BY CHANGING THEIR DEBIT CARD POLICIES.
Debit cards were meant to offer the safety and convenience of a credit card without the danger of going into debt. But millions of Americans have lost money when they were surprised by an overdraft fee – or several – averaging $34 for debit card purchases which they thought they had the funds to cover.
As recently as 2004, 80 percent of banks and credit unions routinely denied debit card transactions that would have overdrawn their customers’ accounts. Many Americans counted on this backstop as they made small, quick purchases, trusting that if their balance fell below zero, their card wouldn’t work.
In a complete reversal, today the large majority of customers are enrolled in overdraft programs where debit card and ATM overdrafts are routinely approved, even when their customers don’t have the funds.
AUTOMATIC APPROVALS ARE COSTLY.
This so-called service does not save customers any money. When your debit card transaction is denied, you don’t pay merchant fees because you either complete the purchase with another payment method (such as cash or a credit card) or cancel the transaction. You don’t pay NSF fees, either. Approving the transaction saves you nothing, and in fact, it is very costly.
The average shortfall triggered by a debit card transaction is $17. So essentially the bank is charging $34 for a $17 loan that will be paid back in just a few days, when the customer makes another deposit. Overdraft fees beget more overdraft fees by putting customers further in the red, which makes future transactions more likely to bounce. Banks and credit unions collect $24 billion per year in unfair overdraft fees, with at least $10.5 billion triggered by debit card transactions.
CONSUMERS WOULD RATHER BE DENIED.
A CRL survey found that 80 percent of consumers would rather have purchases of $5, $20 or $40 denied if it would cost them a $34 fee. The average debit card shortfall is only $17.
MOST BANKS FAIL TO GIVE THEIR CUSTOMERS AN INFORMED CHOICE.
Many banks and credit unions enroll their customers in this expensive overdraft coverage as a default, without allowing customers to make a clear decision that they want small purchases approved, even if it means paying a $34 fee. Some banks don’t even allow customers to opt out of this system.
TAKE ACTION TO MAKE OVERDRAFT PRACTICES FAIR.
Proposals in Congress would force banks to get their customers’ explicit permission before enrolling them in a system that automatically covers debit card transactions for a fee. It would also make fees reasonable and limit the number banks can charge, as well as banning unfair practices like re-ordering debits to increase overdraft fees.
Published: November 4, 2009