Many consumers use debit cards to pay for purchases and later find they incurred overdraft charges. New laws, which went into effect August 15, 2010, will make it more difficult for financial institutions to charge overdraft charges on debit cards. Unfortunately, the new laws will not eliminate the charges. And many consumers, unfamiliar with the law, may sign up for programs that allow the financial institutions to still charge hefty overdraft charges.
The new law allows your bank or selected financial institution to charge you overdraft charges only if you agree to be charged in the first place. Typically, the bank will enroll you in an “overdraft protection” program either when you initially create the account, or by opting into a program after receiving marketing literature.
Often, the literature from the bank describes a scenario where a consumer is short by a small amount for a purchase. Imagine being at the grocery store and finding out after the groceries have been bagged that you can’t pay for them; wouldn’t you feel embarrassed? Or if you are paying for dinner on a date, and your debit card is rejected because you are just a few cents short in your account? The bank literature typically plays on how the consumer might feel embarrassed and/or inconvenienced if the consumer doesn’t have enough money in their account to pay for their purchase. So for a “small” fee, the bank will cover your purchase, even if you don’t have the money in your account for it.
Overdraft charges often are as much as $25 to $35 per incident. Often the consumer is unaware that they are incurring an overdraft charge at the time of purchase, so it is possible for a consumer to incur many overdraft charges in just a day or two. For cash-strapped paycheck-to-paycheck consumers, a series of overdraft charges can easily begin the path to financial ruin. The best protocol is to simply avoid ever incurring overdraft charges.
So how do you avoid incurring overdraft charges on your debit card, especially if you don’t have a credit card to use? Try these techniques:
*If you can avoid signing up for the courtesy overdraft protection that your bank or financial institution offers, don’t sign up.
*Be aware of how much is actually in your account; plan your purchases so that you are within your budget.
*Don’t spend money based on check deposits until you have verified that the checks have actually cleared.
*If you have a savings account, ask to link the savings account to the debit account (typically a checking or money market account). That way, if you do find yourself needing to spend more than is in your debit account, you are reaching into your own savings account, not the banks’ short-term lending funds.
*If you have access to a credit card or line-of-credit, consider linking your debit to the credit line.
*Find out how your bank processes debits and credits; it can make a significant difference in whether you incur overdraft charges or not.
Be aware that some banks daily gather up all of your checks and debits (purchases and ATM withdrawals), then put them in order of largest to smallest, deduct the money from your account, and then credit your deposits. When banks use that sequence, consumers suffer. Imagine this scenario: Your account has $1,000 in it. You go to your bank, deposit a check for $200 and cash for another $200. You think your account has $1,400 in it right? But let’s also imagine that you had written $1,225 in various checks, and a $75 debit charge at a restaurant, that also are presented on the same day to your bank:
$900 for rent,
$150 for electric,
$ 70 for telephone,
$ 50 for water,
$ 30 for a doctor’s visit copay
$ 25 for a donation to the local fire company
If your bank handles all the debits first, then the only check that will clear is the $900 rent check. All of the other checks, as well as the $75 restaurant charge, will each incur an overdraft charge. If your bank charges a typical $30 overdraft charge per incident, then you have incurred six overdraft charges, or a total of $180, in just a single day – when you thought you had enough money in your account. Worse, your account is now also $80 overdrawn, thanks to all of the overdraft account charges. So the $1,000 in the account is gone, the $400 in deposits is gone, and you still owe the bank another $80 (or more, if they charge an overdrawing charge as well). Most banks will notify the account holder and give you just a few days to bring the account bank into good standing before charging even more fees.
Conversely, at a bank that applies all credits first before applying debits, the consumer would have incurred no overdraft charges. The $200 cash deposit would have been applied immediately, at least $100 of the $200 check would have been made immediately available, and every single check and the restaurant debit would have been covered by your own available funds. It pays to learn how your bank applies credits and debits. If you don’t like the policy your bank uses, go elsewhere.
Shop around; be an informed consumer; and do your best to spend only what you have available to spend. That is how you avoid overdraft charges on debit cards.