Does That Pack of Gum Need to Go on a Debit Card ?
NEW YORK TIMES March 31, 2007
R. C. Welborn, a college student and part-time contractor in Pensacola, Fla., has learned a hard and costly lesson about debit cards. He said he got his first clue about potential pitfalls involving overdraft fees a year ago.
R. C. Welborn had overdraft fees, even though he thought funds in the account covered his purchases.
At the time, he said, he checked his online bank statement, which showed he had $80 in his checking account. Over the next few days, before his paycheck was deposited, he said, he used his debit card for two gasoline fill-ups, snacks and cigarettes, totaling about $65.
About a week and half later, he said, he checked his account again and found overdraft fees of $120, or $20 each on six purchases, although the amount of money in the account was more than the total cost of what he bought.
“I couldn’t figure out what was going on, I knew I had money in the bank,” Mr. Welborn, 25, recalled recently.
What he did not know was that debit card purchases at a gasoline station sometimes result in what is known as a hold being placed on checking account funds beyond the sale price of the gasoline. He now says he believes a hold resulted in at least six smaller purchases overdrawing the account.
In the old days, a bank would have simply denied the debit card charges or notified the consumer there were insufficient funds. Not anymore.
“This is a whole new area where customers can overdraft,” said Eric Halperin, lead author of a report by the Center for Responsible Lending, which examined the practice. “We found that almost half of all overdraft fees, which would certainly put it in excess of $4 billion a year, come from debit or A.T.M. cards.”
Consumer advocates who study debit cards point to overdraft charges as just one more thing to keep in mind when using the cards for purchases. In recent years, according to a 2004 government study, debit cards have become the payment method of choice when it comes to using plastic for purchases, and as the cards have grown in popularity so have the fees and transaction intricacies that go along with them.
“You should approach your debit card with care,” said Jean Ann Fox, director for consumer education with the Consumer Federation of America. “I know some people who don’t even use their debit card anymore.”
At the top of the list of things to understand are fees.
Debit card transactions were once free, but that is no longer always the case.
Consumers may be unaware that some banks charge them a fee when they key in their personal identification number, or PIN, rather than sign for the transaction. Studies have found fees that range from 25 cents a purchase to $1.50; some banks charge a monthly fee for the service.
Those fees, which are not disclosed to consumers at the point of sale, became the focus of a Federal Reserve Board study in 2004. Since then it appears the trend has been away from the charges. A survey released by Bankrate.com on March 12 found that a number of large banks have eliminated the charge.
“We were shocked to find out that of the 100 banks we surveyed only 7 charge a point-of-sale fee for PIN transactions,” said Ellen Cannon, assistant managing editor with Bankrate and author of its Plastic Rap blog exploring things like credit cards and gift cards. “Of those, five are charging per-transaction fees and two charge monthly fees.”
These days, however, far more attention is being given to fees banks charge when consumers overdraw using a debit card or by making an A.T.M. withdrawal. A study released by the Center for Responsible Lending in January, which was based on a review of 8,500 overdrafts and an online survey of 2,400 checking account holders, found that debit card purchases and A.T.M. withdrawals prompted 46 percent of so-called overdraft loans being offered by banks. Paper checks were found to cause about a quarter of the loans.
Overdraft fees have been going up steadily in recent years, Mr. Halperin said, expressing particular concern about overdraft programs or “bounce protection” that banks are providing customers, sometimes without their knowledge.
Under the programs, the purchase is covered but the customer is charged a fee — the average found by the center was $34 — every time a purchase exceeds the amount in the account. Mr. Halperin said the fees were little more than a high-cost loan on purchases.
Consumer advocates said banks had also began to pay out charges from largest to smallest, which can result in the largest charge overdrawing the account and then several more generating fees.
Representative Carolyn Maloney, Democrat of New York, has introduced legislation in Congress that would require banks to warn customers whenever an A.T.M. or debit card transaction was going to overdraw their account, provide information on the cost of the loan and give them an option on whether to proceed.
Nessa Feddis, senior federal counsel for the American Bankers Association, said consumers needed to understand fees attached to debit card transactions and to stay up to date with that information because it changes.
As for overdraft fees, she said banks have long covered overdrafts as a convenience to their customers. She said fees were attached to the service to discourage abuses.
When it comes to processing transactions, she said, larger amounts are often processed first because they are frequently the most important, for example mortgage, car or insurance payments.
She noted that consumers could avoid overdrafts by being diligent in keeping track of their balance.
Consumers should keep track of their bank balance, but consumer advocates say the process is more complicated these days. For example, some merchants now process personal checks electronically almost like a debit card. Additional fees for things like debit card use and foreign transactions may deplete a checking account balance without the consumer’s knowledge. Consumers also should be aware that fraud protection may not be as good with a debit card compared with a credit card.
While Visa and MasterCard say they extend their “zero liability” policy on debit card transactions processed on their networks, debit cards are governed under the Electronic Fund Transfer Act, which provides less coverage. Under the act, a debit card holder’s liability is capped at $50 if the bank is notified within two business days of the suspected fraud or missing card. Waiting longer may result in liability of $500.
And even when the bank does cover the costs of fraudulent transactions, a consumer’s bank account may be without those funds for an extended period while the fraud is being investigated.
“There’s a fundamental power difference dealing with a dispute on a credit card and debit card,” Ms. Fox said. “With a credit card you can say I’m not paying this bill until the issue is straightened out. With a debit card you’re saying, ‘Please put my grocery money back while you investigate this unauthorized purchase.’ ”
Mr. Welborn, who estimated he has paid at least $2,000 in overdraft fees because of the debit card, is much more careful these days.
“The quickest way to bankrupt yourself is not knowing what’s going on with your debit card, but if you don’t get a warning when you’re doing it how do you know?” Mr. Welborn said. “I won’t touch a debit card anymore. I do everything with cash.”
nytimes.com |
