If you’ve followed this site for any length of time, you’re likely aware that I’m not a huge fan of debit cards. While I recognize that they can be quite convenient at times, debit cards simply have too many disadvantages for me to use one instead of a credit card.
In the past, my biggest concern has been fraud. While debit card issuers typically offer fraud protection on par with credit cards, fraudulent activity typically results in an investigation before the questionable charges are eventually reversed. I’m not sure about you, but I don’t want a portion of my bank balance tied up with things get sorted out.
Fees, fees, and more fees
Well, after reading this article, I now have one more reason to dislike debit cards: overdraft fees. I know what you’re thinking — any responsible debit card user won’t overdraw their accounts, but…
We’re all human, and it might happen. In fact, it did happen to Peter Means, who’s been using a debit card to reign in his spending, but wound up getting hit with seven different $34 overdraft fees in a single day.
“[Means] was stunned when his bank charged him seven $34 fees to cover seven purchases when there was not enough cash in his account, notifying him only afterward. He paid $4.14 for a coffee at Starbucks â€” and a $34 fee. He got the $6.50 student discount at the movie theater â€” but no discount on the $34 fee. He paid $6.76 at Lowe’s for screws â€” and yet another $34 fee. All told, he owed $238 in extra charges for just a day’s worth of activity.”
To make matters worse, he had actually deposited sufficient funds a few days earlier, but it took too long for these transactions to clear.
Doing us a favor?
The problem here is that banks allow customers to overdraw their accounts without warning. Sure, they call it “overdraft protection, ” as if they’re doing you a favor but they don’t actually ask if you want it. And why would they? Banks are expected to collect tens of billions of dollars this year on overdraft fees alone.
Compare that to the situation with credit cards. Under the terms of the CARD Act of 2009, cardholders will have to opt in for approval of over-limit charges. In other words, you can protect yourself from inadvertent credit card fees.
Rep. Carolyn Maloney (D-NY) has actually introduced legislation to level the playing field between credit cards and debit cards by requiring consumer consent before banks can permit (and charge for) overdrafts. The legislation would also regulate overdraft fees and prohibit banks from maximizing overdraft fees by manipulating the order in which transactions are posted.
Of course, such restrictions will come at a cost. If banks lose overdrafts as a major profit center, some industry experts are predicting that they’ll start charging monthly service fees on formerly “free” checking accounts. That way we can all share the joy.