Debit Cards Causing Overdraft Fees
I just read that the Durham, N.C.-based Center for Responsible Lending has just published a study about debit cards and overdraft fees.
According to this report, banks and credit unions may provide expensive overdraft protection plans for users, but rarely gives them the opportunity to “opt-out” if they’d like to. Furthermore, according the study, users aren’t told or given the option to link their debit cards to other accounts for purchases to draw from in the event of an overdraft fee.
I realize that I’m about to make myself very unpopular here, but I think this study is ridiculous. I think this study is the reason people are distrustful of banks and credit unions and I think telling people that it’s the bank or credit union’s fault diminishes personal responsibility.
Let me explain.
First of all, when you get a debit card from your bank you agree to the terms and conditions that are listed within the disclosure that is given to you. By federal regulation, you should be given a disclosure. If you’re not, then you have cause to blame the banks. Nevertheless, I know from personal experience that I tell EVERY one of my clients that they could potentially overdraw their accounts and they absolutely need to keep a register. I tell them repeatedly in that meeting when I hand them the debit card and disclosure.
Every bank I’ve worked for, all of the employees have been good about telling the customers about this possibility. Here’s the thing. About 94% of people that come into the bank to get a new checking account - or debit card - have their mind on getting in, getting their business taken care of, and getting out. Everything the bankers spend their time telling people about goes in one ear and out the other. So, this study suggests that it’s all the bank’s fault that they customer didn’t know the debit card could overdraw the account. That’s ridiculous. Customers are told, they’re given a disclosure, and they’re told again. Customers don’t always listen and people have a problem taking personal responsibility. That’s why people are paying fees for overdrafting with their debit cards.
As far as “opting out” goes, I’ll give them that to a certain extent. Some banks don’t have that option available. It’s not out of spite or greed; it’s simply a system limitation. Most banks have their systems designed by a third party and getting upgrades can be fairly expensive - especially if they’re not the only ones using the software. For a bank to request a custom upgrade for one feature when three or four other banks are using the same system are not requesting that feature, it can cost the one bank upwards of $10,000. Sometimes that’s just not cost effective, period.
The next thing that this study fails to point out is the difference between actual overdraft protection and the courtesy amount a bank will allow you to overdraw. There is a very big difference and people need to understand that. Overdraft protection is simply that; it protects the consumer from getting hit with overdraft fees. If you’re getting overdraft fees, then you don’t have overdraft protection. Now, real overdraft protection works one of three ways. Either your bank or credit union will link another checking or savings account to your primary account, they’ll link a credit card, or they’ll link a personal line of credit.
If there is a secondary account linked to the primary, the bank may charge a nominal fee for the transfer - I’ve never seen this any higher than $5. However, considering without that transfer you’d be paying anywhere from $30-40 for an overdraft fee, it’s a much better option. The transfer fee is different than the overdraft fee so this constitutes overdraft protection.
If there is a credit card linked to the account, then any time you overdraw the account it pulls from the credit card to cover the transaction. There’s usually not a fee associated when pulling from credit cards, but you are saddled with interest if you don’t repay it before the end of the grace period. The line of credit is similar to a credit card except there’s no plastic involved and can be a higher interest rate. I will tell you that most bank and credit union employees get incentives for cross-selling bank products and one of the easiest ones to sell is overdraft protection. So people are told about these options in most cases.
Now, the courtesy amount that a bank allows you to overdraw is something completely different than overdraft protection. This is a little leeway that consumers have with their cards to avoid the embarrassment of being declined in public. It is a set amount - usually dependent on several account factors - which a person can overdraw their account to before the card is declined. You will pay overdraft fees per item that overdraws the account up to the allotted number for the day. So for example, if your bank’s overdraft fee is $32 and you have 10 items that come through for the day to overdraw your account, but they have a cap of 6 per day that you’re charged, then your fees are $192 as opposed to $320. It’s still a lot, but that cap usually helps a little.
With many banks and credit unions you can “opt-out” of this courtesy. But you have to understand that by doing so, you will be declined in public. For some that’s better than paying the overdraft fees. For others, they’d rather not be embarrassed. So, banks do give their customer’s a choice in most cases - with the exception of those that don’t have the system capabilities to do so.
All that said, I still think there needs to be a level of personal responsibility with this. There are exceptions to every rule, but for the most part, banks and credit unions do not set out to deceive their customers. Mistakes happen because we’re all human and it’s entirely possible that an employee or two will forget to explain exactly how the debit card works. However, in my experience, what happens more often is that people hear what they want to hear. And that’s the problem with this study. It’s based on discussions with customers, who may very well have been told about the way the debit card works - and received the disclosures with how it works in writing - but they didn’t really hear it. So they just assume they were never told.
Ok, your turn. Feel free to disagree with me if you’d like. Keep in mind that everything I’ve talked about is based on personal experience. While I haven’t worked at every bank, I have worked for three major banks, a commercial bank, and a credit union. My position on this is from what I have observed in my career and what my peers from other banks have observed. I think sometimes banks and credit unions get a bad rap because of lack of personal responsibility. Not always, but sometimes.
Let’s discuss.
I’m young and naive… I don’t have much to contribute to this discussion… but I wanted to let you know that I learned quite a bit from your post. I’m tired of overdraft fees (I usually don’t go into overdraft, but because of some miscalculations this month I went into overdraft like 3 times!)…. I will strongly consider opting out and just being denied. That would be fine by me!
Overdraft fees can really cost you. And sometimes it’s just a matter of not keeping track of those ATM fees. One way to avoid that is taking out a cash advance or payday loan. That way you can borrow from your next paycheck, get it deposited into your bank account next day, and avoid those costly fees. Just a little tip I learned.
Great post!
JB, keep in mind that even if you opt out, it’s still possible that you’ll get hit with a fee for a declined transaction. The best way to avoid fees is to make sure that you don’t spend more than you have. No more miscalculations!
At my old bank when people had their overdraft set up on their credit card it was treated just like a cash advance. There was a $10 fee and the cash rate, no grace period. Which depending on your situation could be better than getting an overdraft charge, or maybe not. If you have a large balance on the card already then it’s going to take a long time to pay off that cash balance, could end up costing more in the end.
I think a credit card should be the last option for overdraft protection.
Ashley - The way you described it, you’re right, it’s not the best option. I have an account that lets me overdraft onto a bank credit card with no fee, and I have no balance on the credit card. In that case, it’s a great option for overdraft protection. It all depends on your bank and your situation.
@ JB - I’m glad you were able to take something away from the post. Mistakes happen. Did you talk to your bank and see if there’s anything they could as a one time courtesy?
@ Kristie - I would advise against cash advances and payday loans. They cost money too, and very often more than the overdraft fee would have been. Perhaps I’ll write a post about those payday loans to show you how much you’re spending. They can cause vicious cycles as well.
@ Walt - Typically, your bank will not charge you to decline a debit card transaction. They will charge you a fee for return items when a check comes through because they have to send it back and it requires manual processing. I’m not saying that makes it right, but that’s why they charge. However, with a debit card, if you request that no overages be allowed, you’re not usually charged for that. If you’ve been charged by your bank or credit union for debit transactions, I’d recommend looking at another bank. I can tell you Chase, Compass, Bank of America, and Wells Fargo don’t charge for return items of a debit transaction. I also know the credit union I work for doesn’t charge either. That’s why the Fed is pushing to regulate this particular portion of bank policy, so that consumers are not charged. Of course, in terms of regulation, if the Fed forces the banking industry’s hand on this, there is the possibility that banks will start charging for return items on debit transactions like they do for checks. However, I don’t think they will.
I know some people who actually depend on the overdraft protection to get through to payday. It’s like a trap for them, they use it and I have one friend who actually had to get a second job for a while to get caught up and get out of that trap.
I know some people who actually depend on the overdraft protection to get through to payday. It’s like a trap for them, they use it and I have one friend who actually had to get a second job for a while to get caught up and get out of that trap. He actually was using that overdraft for well over a year until I set him down and showed him exactly how much money he’d wasted over the year. We are talking over $3,000
I have two debit cards and both of them came in the mail after I had opened my checking accounts. They came in a separate envelope, with no literature or rules explaining how a debit card works. I don’t use them.
From what I’m reading in these blogs, 90% of the people must think that a debit card gives them free access to money they don’t have, similar to the idea that if they have 1000 checks, they won’t run out of money until the last check is written.
No wonder this country is in bad shape! It looks like our Government got their debit cards in the mail, without explanation on how they work!
It’s not so much that I disagree in principle - I’m perfectly willing to cut the banks some slack - but my personal experience has been very different. I found out about overdrafts the hard way years ago - and I had read the disclosure. I am a compulsive contract/disclosure reader. Yes, it’s there but it’s not usually clear in the disclosures I’ve read.
I’ve had multiple accounts in various banks over the years and only one ever explained/encouraged overdraft protection tied to a savings account. A few encouraged it without the savings account when it was opt in - but I usually have to ask if it requires an opt out.
I do agree that consumers have to bear responsibility for their decisions but banks/credit unions don’t always do a very good job explaining the ins and outs of their various accounts/features/policies. With an ever growing blizzard of account types and features only very savvy or extremely meticulous consumers can reasonably navigate the mess.
Banks/credit unions do have a responsibility to make their terms clear enough that the majority of consumers can easily grasp what those terms are and imply - and that is something banks/credit unions don’t usually do very well in my experience. Maybe it isn’t some ulterior way of making more money off the hapless consumer but it is still a failing of the system.
This is my opinion based on my experience - obviously differing from the experience of the author. Your mileage may vary.
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It’s not so much the overdraft thing that bothers me it is the forecasting of a debit card purchase that has not cleared and already being accounted to my checking. If it hasn’t actually cleared what ever process then, it should be charged to my account when it clears not before. What really bothers me is when I get double billed for overdraft fees because of this. Without the prediction transaction 1234 should clear…uh oh in two days a charge will be accredited to my account that will cause both to bounce?