Debit cards ... more than meets the eye
by Don Kuehn
EVEN THOUGH debit cards haven’t been around all that long, they have become ubiquitous players in the retail marketplace. Particularly for young consumers with scant credit history, they offer a convenience that mimics credit cards, and because they’re linked to one’s checking account, they’re supposed to have built-in discipline.
However, that link is easily broken. It’s estimated that young adults ages 18 to 24 pay more than $1 billion in overdraft fees every year. They like to use them in lieu of cash, even for small purchases like coffee or fast food. The problem is, if you’re overdrawn by even the smallest amount, you can incur multiple overdraft charges in the same billing cycle.
Let’s say you use a debit card for lunch every day—averaging about eight dollars. During the month, you have a car problem and use your card to pay the mechanic. The unexpected charge causes you to max out your checking account a few days before payday.
You buy lunch as usual over the last four days of the month and assume the cost is about $32. However, your bank charges an overdraft fee of $29 (the national median, up 5.4 percent from last year) each time you exceed your checking account balance.
So, big spender, those burgers actually cost you $116 in fees in addition to the $32 in actual cost. That’s certain to give you indigestion.
A lot of people were lured into debit cards by attractive reward programs, like cash back and airline miles, but these perks are becoming rarer. According to Bankrate.com, reward programs have decreased by 30 percent in the last year.
A Federal Reserve rule that went into effect in August 2010 requires banks to get your consent before approving debit card transactions larger than your balance. But a Center for Responsible Lending study in 2011 says many banks waged aggressive campaigns to get consumers to sign up for overdraft protection, which automatically approves purchases that exceed your balance—for a fee, of course.
Overdraft charges are just the most galling of the fees one pays for the convenience of swiping plastic instead of writing a check or (gasp!) paying cash. Each time debit card holders draw cash from an ATM outside their network, they’re charged on average $2.40 by the host bank and $1.41 by their own bank.
A merchant that accepts debit cards is charged a “swipe” fee (called an interchange fee) by the issuing bank. That fee used to average about 44 cents, but under new regulations that took effect in October 2011, it was cut to about 24 cents. The result? Banks lost revenue. And when banks even think they’re going to lose money, they take action: hiking checking account fees, offering fewer free checking accounts, raising monthly maintenance fees and bumping minimum balances.
And consider this: A fraudulent charge on a credit card has a loss limit of $50, but there is no similar cap on debit card losses after the first two business days. Now, I know, you would never lose your debit card or have it (or your account number) stolen. But if the overdraft protection on your debit card is linked to your savings account, a thief could clean out both your checking and savings before you know it.
If you wait until you receive your monthly statement to check your transactions, you could miss any grace period the issuer offers. Check your balances frequently; review your statements as soon as they arrive; and notify your bank immediately if you detect anything suspicious.
Among the factors that determine your credit score, and therefore the interest rate you will pay on major purchases, are your credit history and credit utilization. A debit card does nothing to help you establish either one. A credit card, on the other hand, does. If you swipe your credit card and promptly pay off your charges, you can improve your FICO score, which, in the long term can help you secure loans at a lower rate for a car or other major purchases.
Maybe you think a prepaid card would be a good alternative to a debit card. After all, you have to “load” the card with real money before you can use it. But these cards are rife with fees peculiar unto themselves. The average monthly fee is $4.56 according to CardHub.com and can be as high as $10. Some issuers also charge fees when they’re loaded or if you need to speak with a live customer service agent. Prepaid cards also don’t do anything to help your credit score.
If you are still enamored with the notion of debit cards, or if you’re just too lazy to take a few simple steps to switch to credit cards, here are a couple of things you can do, taken from Credit.com:
- Keep your check register up to date. That means writing down every transaction and subtracting it from your balance (just like your mom told you to do when you write a check).
- Don’t forget to enter the fees you pay when you use an ATM. A misplaced ATM fee can send you over your balance and lead to overdraft charges.
- Keep an eye on your monthly statement and check your account online frequently. If anything looks fishy, contact you bank immediately.
- Consider adding some “phantom cash” to your account. Build yourself a little cushion (say $50 to $100) that you won’t touch because you don’t include it in your working balance.
- Ease up on debiting small purchases. They’re harder to keep track of, and they make balancing your checkbook a nightmare. Pay with cash whenever you can.
- See if your bank offers e-mail alerts that warn when your balance is below a limit you set.
- The most expensive insurance you can buy is overdraft protection. First, you get complacent about tracking your spending; second, the fees associated with an overdraft coverage average $29 per event, but some banks add a $2 to $5 daily fee until your account balance is again in the black. Call your bank and see if you have been signed up for “courtesy” overdraft protection and, if so, consider canceling it.
- Don’t use a debit card to buy gas, check into a motel or rent a car. These merchants place a block or hold on your checking account—often the full amount of the purchase, plus 20 percent or more. This affects the available balance in your account for a few days and boosts the chances that you will go over your balance.
- Contact your bank anytime you think something’s awry. Mistakes happen. Sometimes you can throw yourself on the mercy of the bank and get charges waived—but don’t bet on it.
I’ve never been a fan of debit cards; maybe you’ve had good experiences. The best way to protect your money is to use credit, and use it wisely. Find a no-annual fee credit card, pay off your balances each month and avoid interest charges or late fees. That way you build your credit history and boost your credit score.
Don Kuehn is a retired AFT senior national representative. For specific advice relative to your personal situation, consult competent legal, tax or financial counsel. Comments and questions can be sent to firstname.lastname@example.org.