A Warning on Debit Cards

Check this out from the NY Times:

When Peter Means returned to graduate school after a career as a civil servant, he turned to a debit card to help him spend his money more carefully.

So he 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 — and a $34 fee. He got the $6.50 student discount at the movie theater — but no discount on the $34 fee. He paid $6.76 at Lowe's for screws — and yet another $34 fee. All told, he owed $238 in extra charges for just a day's worth of activity.

Mr. Means, who is 59 and lives in Colorado, figured employees at his bank, Wells Fargo, would show some mercy since each purchase was less than $12. In addition, a deposit from a few days earlier would have covered everything had it not taken days to clear. But they would not budge.

Banks and credit unions have long pitched debit cards as a convenient and prudent way to buy. But a growing number are now allowing consumers to exceed their balances — for a price.

Banks market it as overdraft protection, and the fees it generates have become an important source of income for the banking industry at a time of big losses in other operations. This year alone, banks are expected to bring in $27 billion by covering overdrafts on checking accounts, typically on debit card purchases or checks that exceed a customer's balance.

In fact, banks now make more covering overdrafts than they do on penalty fees from credit cards.

But because consumers use debit cards far more often than credit cards, a cascade of fees can be set off quickly, often for people who are least able to afford it. Some banks further increase their revenue by manipulating the order of a customer's transactions in a way that causes more of them to incur overdraft fees.

Ok, a few thoughts here:

1. Why use a debit card when a credit card can earn you cash back? I charge $20,000 or so a year and thus will net $400 using my Schwab Visa doing nothing different that what I'd do otherwise.

2. Isn't the guy in the above example playing it too close for comfort? If you're on the cutting edge of solvency, you probably don't need a coffee, a movie ticket, etc.

3. Banks are not your friends. They are quick to deduct money from your account, slow to deposit it, and looking for every possible fee they can hit you with (and at $34 a pop too -- ouch!). You need to be aware of this fact and act accordingly -- leaving yourself enough room for error in how you spend/deposit with them.

4. $27 billion per year by covering overdrafts on checking accounts. Wow.

5. "Banks now make more covering overdrafts than they do on penalty fees from credit cards." I wonder if this will make Dave Ramsey change his tune and switch to recommending credit cards.

Comments

[bill]

While I use my credit card more often than not, I have never understood why people get overdraft fees. Every bank and credit union I have ever belonged to has offered some sort of overdraft account. With Wells Fargo, if I overdrafted, they would transfer over $100 from a line of credit account. I hated the $100 transfer so I went to a Credit Union and they set up an overdraft protection line of credit and transfer over what I go over (if I go over 3.50, they send $4 into my account). I will maybe go a few days waiting for a paycheck then pay back the line of credit with like 5 cents interest.

I have never paid a fee for any of this and jsut a few pennys in interest.

[robert w]

I must be real 'old school'. What happened to paying cash and stopping when you have none. What about KNOWING your balance in Your account.
Feel sorry for these folks? only the first time.
Playing with bankers is like playing with hookers - you will get ..... sooner or later.

[spivey]

I don't think Ramsey will recommend credit cards. He will continue recommending to pay with cold, hard cash. I don't believe he recommends paying with debit cards.

[FMF]

Spivey --

He does recommend debit cards -- because they are basically the same as paying with cash.

[Matt]

How have people not learned that the bank does this?! Who is surprised by this?

[Benjamin Bryan]

I think bill has it right, if you can't keep a close eye on your finances an automatic overdraft account would avoid those fees and you only have to pay the interest for the amount of time that you go over. ING Direct and Schwab offer overdraft accounts.

But, I like FMF's strategy of charging everything and earning cash back. Even if you are careful mistakes can happen with transactions. One of my friends got double-charged for an item and got hit with an overdraft fee as a result (he eventually got the bank to fix it but after several letters and much hassle). Also during a dispute your credit card company is out the money, and if you lose a dispute you can always refuse to pay and write the credit bureau about it when it shows up on your credit report. If you lose a dispute with a debit card you are out the money.

[Eugene Krabs]

Makes me think that this individual may not be all that financially savvy. Because I agree with FMF's objections, but I think they should also be obvious....

[Ella]

With the internet - there is no excuse not to know your bank balance and balance your checkbook. Seriously.....

[Dar]

First of all, it's Wells Fargo. They'll treat you like a windshield treats a bug. This guy should move to a credit union if he wants a financial institution that will actually respect a regular customer.

Second of all--and I think people are missing this--he made a deposit several days earlier that should have covered these expenses. I've known banks to post these transactions immediately to your online account so it looks like your balance includes the deposit automatically, but the money is not actually there until the banks clears the transaction. Especially when dealing with checks, this can take 2-3 business days or more.

If that's the case here, then I would blame the bank for giving him a false sense of his true balance before the funds were actually available.

[rwh]

I have to use the debit card at least 12 times per month to qualify for the 4.5% interest rate on my checking account balance. But of course, I keep about $25k in the account so no worries about overdrafts.

For everything else there's VISA.....my Schwab Visa. Almost $500 in rewards since the first of the year.

The guy should have known better, or at least checked the balance on his receipts, or stopped at an ATM to check the balance. It isn't rocket science.

[Angie]

I don't think any of you are seeing the issue. His deposit was likely held purposfully so the bank could charge overdraft fees. This happened to me a few months ago. Somehow mysteriously a cash deposit in the ATM, which usually shows up immediately if not the day after, was kept as pending for nearly a week. In the mean time they stuck me with (3) $39 overdraft fees all for items less then $10.

[Juliet]

Get Rich Slowly talked about this same topic the other day. A lot of opinions were the same: don't get so close to zero that you have a chance of incurring these fees. I may not be the most financially savvy person, but I am aware of over the limit fees... they're pretty standard these days. Check your bank account balance, people!

I have an overdraft, and am aware that if I go into it, I will incur interest. I am fine with that. I'm not going to cry that my bank is evil or something. Take some responsibility, people!

[Corporate Barbarian]

I wrote about this topic a couple of weeks ago. Isn't it thoughtful that the bank didn't notify him at the time he exceeded his balance, and dragged their heels on his deposit. I rarely, if ever, use my debit card for purchases. I'd rather rack up rewards on my credit card, and pay off the balance the next month.

[Juliet]

@Angie: Cheques are slow to clear quite often. You have to check your bank account to make sure the money is in there. I don't see how this is the bank's fault. Don't assume anything - check your account before you spend. Or don't get so close to zero that a few small purchases screw you over.

My bank allows me a certain % of any cheque I deposit right away - days before it clears. I assume some banks in the US do the same... maybe you should look into it.

[Pete]

This isn't a problem with debit cards, it's a problem with the bank.

My credit union lets me deposit a $500 check IN AN ATM and withdraw that $500 IMMEDIATELY after. Why do fools still use banks? Because they're fools.

It's your fault for using that bank, just like it's your fault if you spend $40 on a USB cable worth $0.95 at BestBuy.

[Dar]

Angie--I agree with you 100%. The banks will post the deposit and make it appear the funds are available when they're not, as I commented earlier. They then typically back themselves up with a blanket statement, "deposited funds may not be immediately available". However they have no problem giving you a false sense of security by telling you what your inflated available balance is by including the deposit.

The real solution would be for the bank to:
1. Not credit your account until the funds TRULY are available
2. Decline any debit card transaction that causes an overdraft

But that's assuming that the bank actually cares about the customer.

[Josh Stein]

Yeah, we need to look into a credit union that just opened up a branch a couple blocks from my house.

[Ellen / MoneyLounge]

I have heard this story before and am still disappointed to see that it is being used as an example of how "banks are so mean." Yeah, banks are going to cheat you for your money, but so is everyone else. Welcome to the real world. We need to take responsibility for our own spending and know how much we have in our accounts before we get carried away with our plastic. I'm not saying banks are in the right, but spending more than you have... isn't that wrong too?

[Noadi]

I treat my debit card EXACTLY like a check, I even keep it in my checkbook so I can immediately see my balance and write the amount in (why not use a check or cash? the debit card is less of a hassle and I rarely keep more than $50 in my wallet it's too tempting). I have never overdrawn my account using my debit card.

I sympathize with the guy on the overdraft charges but it's his own fault, no different than bouncing a check would be. I don't like how banks sometimes do business on how long it takes checks to clear and the like but I have a hard time condemning them for this.

[MC]

I agree with the others--this guy's account was way too close to the edge, and he's apparently been living under a rock if he didn't realize he shouldn't overdraw. No pity for you, dude!

[Midg]

Last year, I helped my mother out with a similar mess at Wells Fargo. She had over $500 in overdraft fees in a single month. I helped her figure out how to cover the fees and get a buffer in place. A few days later she got hit with a few more charges because her social security deposit was late (the buffer was not yet in place). We talked to the local bank manager and he dropped all but one of the charges. Another problem she had was the bank allowed a charge that put her at a negative balance then started charging her a $5 a day fee for each day she had a negative balance. There were no phone calls or letters letting us know about the charge or the negative balance. They just silently let it accumulate. This went on for 2 weeks before I caught it. After that we started checking her account every day.

Whatever account you use to pay your bills, you need to keep a buffer balance so you do not get hit with these fees. You also need to check your account balance regularly so you can catch these nasty surprise quickly.

[lincmercguy]

ING's checking account has a good overdraft protection system. You get a $500 credit line automatically. There are no fees to access it. They simply charge interest on money you borrow (I think it's like 10%), so if you overdrafted, then made a deposit to cover it, you would only pay the interest that accrued while it was drawn.

The downside of ING is the ATM situation. They partner with Allpoint for free ATM access, but their ATM's are always finicky and sometimes a failed transaction gets debited anyway (ING always made it right for me though). I think this is more of an issue with the ATM owner than ING themselves.

Just my $.02

[In the Money]

I definitely agree. I never use a debit card since I like to get something in return for spending my money (cash back). Just keep track of your credit card spending like you would a debit card.

[Catherine]

He paid $4.14 for a coffee at Starbucks.
Sounds like he got ripped off even before he was overdrawn.

[RobF]

I was never comfortable with debit cards since I first heard that hotels, gas stations and the like would attach a larger bill (temporarily) on your account than you actually incurred leaving you unable to access your funds. Occasionally I will see a credit card charge pending for a larger amount than actually gets recorded. That would be tough to handle if you are running close. The credit card gives me the ability not to worry about the ups and downs. When I pay the bill I usually pay close to the actual balance. At the closing date my account balance is very low - good for the credit score!

[LotharBot]

"this guy's account was way too close to the edge"

... aside from the deposit he'd put in a few days before that should've covered it.

I once had my bank charge me a $35 fee for overdraft protection. What had happened is that I'd bought a computer from a local store, and they'd authorized (but not charged) one price and then charged a lower price once my student discount was added in. The bank's overdraft protection kicked in because the authorization plus the purchase were slightly more than was in my account -- in other words, I "overdrafted" on an authorization that was never charged. I showed up at the bank and complained for about an hour, and they finally removed the charge.

I don't think I "convinced" them to remove the charge so much as made it clear that I was going to waste way more than $35 worth of their time complaining. Yeah, I get that if I had a history of reversed charges, they probably won't have sympathy, but over one charge, they realized it definitely wasn't worth their time to fight me (and I was in grad school with nowhere to be.)

I eventually left that bank for a credit union with much better rates. I think that's what the guy in the original story should've done -- as soon as the bank demonstrated they weren't going to play nice (as if it's really "protection" when they charge $34 per transaction, instead of a single $34 fee), he should've taken his business elsewhere.

[Terry]

"1. Why use a debit card when a credit card can earn you cash back? I charge $20,000 or so a year and thus will net $400 using my Schwab Visa doing nothing different that what I'd do otherwise."

Paging Dave Remsey! Paging Dave Ramsey!

[Millionaire Teacher]

Much like LotharBot, my brother had an issue resulting solely from "authorizations" that were never actually charged about a year ago. He was a teenager making about enough to buy gas and have fun. A few days after getting paid, (direct deposit), he stopped at a gas station to fill up. Unbeknownst to him, the gas station put a $50 hold on his card even though he only bought $20 worth of gas.

After filling up and paying at the pump, he ran in to get a drink. $1.29. The station put a $50 hold on that purchase, too.

He ended up paying over $100 in "overdraft fees" on subsequent purchases because of that candy bar. Even after he and my parents threw a fit the bank only reversed the first O.D.

Once the actual transactions cleared and they saw that he never even came close to spending more than he had the bank should have forgiven it without prejudice. I believe he closed the account after that and went to a CU.

[kitty]

"I'm not saying banks are in the right, but spending more than you have... isn't that wrong too?"
Why are posters here always assume that? We don't know anything about this guy. For all we know he may have a million dollars in investments on other accounts. Not to mention that he did deposit a check a few days earlier and was sure it has cleared. So he did have the money.

Sometimes people make mistakes too. They can miscalculate. Once I opened a CD on an amount a little too large simply because I forgot to add a couple of things when I was calculating how much I have to leave on checking. I realized the mistake a couple of days later and took cash out of another account via ATM to deposit to my main checking. But had I not noticed it, I'd have the same problem with overdraft. My fault, yes, but hardly because of overspending.

Once, a little over 15 years ago I did have an overdraft. My fault, I admit, and nope, it had nothing to do with overspending. In fact, I had plenty of money in a saving account in the same bank. This was the problem: my only banking experience before that had been a credit union that linked checking and savings account in a way that would simply use money from savings to cover overdrafts in checking. So I assumed this was what everyone did. After I transferred to a different location, I wanted to use a local bank, so I opened both checking and saving accounts there. The bank advertised them as "linked" so I automatically assumed it meant the same thing as with credit union. My paycheck was automatically deposited to the bank. This was before automatic withdrawals or ACH or internet, so before I left on extended vacation I signed a bunch of checks figuring out I had enough money and that another salary deposit will arrive before checks and if not - I had more than ten times as much in savings. Miscalculated. At the time the fees were smaller but the checks were bouncing. After I got back from vacation - oops. Nothing terrible - some $50 in total, but I had to call people whose checks balanced. In most cases they just automatically re-deposited again and by that time my salary got deposited. In a couple of cases they charged me something too, but after a conversation agreed to forgive me "just this once". I think I was out about $50 in total. Unpleasant, but I guess it was the payment for the lesson.

Credit Union arrangement was the best and the one banks could've easily adopted except for this would reduce the profits....

Banks hold is a bit annoying. I deposited around 24K recently - the money cleared from the sale of 200 shares of my ESPP stock - part of my plan to reduce my ESPP holdings. They put 2 weeks hold on it because it was out-of-state and the large amount. 2 weeks without investing the money and without interest... A check from IBM by the way, not some backyard company. Plus, I've been banking with them for years and have more than that on a CD there. I don't normally subscribe to "banks are evil" mentality, but this annoyed me.

"Paging Dave Remsey! Paging Dave Ramsey!"
Contrary to what Dave Ramsey's followers believe, there are many of us here who manage to use credit card and yet have no debt and a reasonable amount of money in savings. I realize that this is difficult to believe.

[Lauren]

BOA, Chase, and Wells Fargo recently changed their overdraft and debit card policies. Most banks will probably follow suit soon. I'm very surprised FMF hasn't posted anything yet on the banks' policy changes and no other commenters have mentioned it. Maybe I'm the only one that reads the NY Times?

[Sarah]

I'm surprised there are so many people out there who still don't realize that the banks are out to create scenarios that generate fees and will behave in ways that you'd think would be unreasonable to do so. (Why can't you opt out of this "convenience?" Hmmm....) This poor guy was probably told it was safer to use a debit card because "you can't spend more than you have with a debit card." Oh, well, wait til it happens to you.

While some of these banks have promised to change their policies, we'll see how it works out.

[kitty]

"While some of these banks have promised to change their policies, we'll see how it works out."
Sarah - it'll be worse for those of us who are responsible. There is nothing in the bill that would benefit people who don't carry balances. But because of this bill, a lot of banks are reducing benefits for us. I just got a letter from Discover about my Discover Open Road card about reducing cash back from 5% to 2%. Thanks much.

[Sarah]

...and yet you blame the government, rather than the corporations who are basically saying that if they're prevented from fattening their profits with grossly exploitative practices, they'll just try to make up the slack bleeding you. Seriously, is it really that hard to figure out who it is that's out to get you in this particular situation? God forbid Discover and its ilk not be able to pay multimillion-dollar bonuses to all the executives who got them last year!

[Sarah]

(P.S. Although I haven't carried a balance in a while, I actually consider it a benefit to me if my worse-off neighbors *aren't* nickeled-and-dimed into an even worse financial situation. I'd rather have that money in my neighbors' hands than in the hands of a few people in New Canaan or Greenwich. But in order to adopt this point of view, you have to understand that you live in a society and some of your well-being arises from the well-being of your neighbors.)

[Mike Hunt]

"He paid $6.76 at Lowe's for screws"...

You mean paid just under $7 to get screwed by WFC... I think it's high time for a class action suit on the big banks.

My understanding is that banks hold deposits and juggle purchases out of order to trigger the maximum number of overdraft fees. Example, you have $300 in the bank and then charge $280, $30, $2.38, $4.35 & 6.76 in separate transactions. Even if the $280 is charged later in the day the bank will deduct the $280 first then the $30 followed by the other smaller charges thus guaranteeing that you get hit by 4 overdraft charges.

Considering they took taxpayer money and had access to the 0% window, this practice should be shut down.

-Mike

[cherryblossom]

I read two lines into the first paragraph and said, 'That has got to be Wells Fargo', And sure enough it was. All you are doing by banking with Wells Fargo is making Warren Buffet that much richer. Buffet invests in companies like Wells Fargo and Geico because they generate a lot of cash. Cash that comes out of their customers pockets.

[kitty]

Sarah - imagine that you are in lending business and do a little math. Let's say you gave $1000 to 10 people without any collateral, $100 each and you estimate that your rate of default is 10% i.e. you are going to lose $100. Think, how much interest you want to charge other 9 people to 1) cover your losses 2) get enough money to pay rent, salaries 3) get some profit - after all lending is your business, so you want to make profit, right?

Now let's say you have different customers - more riskier and less riskier. Like with auto insurance. So, in your less riskier group the default rate is near 0, but in your more riskier group the default rate is 20%. Now, how much rate would you charge a group where the default rate is 20%?

The current default rate is around 10%. This is average for all customers. So, it seems logical that with lower risk customers the default rate is near 0 and with higher risk - it is much higher.

As to whom I blame - I blame whiny American consumers who think they have a god-given right to cheap unsecured credit. Credit is a privilege, not a right. Banks are selling service, it's your choice to buy it or not to buy it. When business expenses are higher, the prices go up. You don't like it, you don't buy it. As to Discover, I don't think they owe me or anybody 5% or 2% or any cashback at all, so it's entirely their choice how much they'd give me. The fees aren't nice, but they are easy to avoid. Some practices aren't nice, but you have a choice - you don't like a business, you go to another one.

[Tara]

Kitty, you are so right. I used to whine about the APR's, about the system that lowers your credit score if you check it too often and look out for better deals, all the fees and so on. Then I decided to simply pay off my debt and never use credit cards again. If I need some extra cash, I can always get it on the net.