Debt smart

website - scott bilkerBy Scott Bilker

Debit cards have become a very popular way to pay for everything from fast food to rental cars. The Federal Reserve reports that debit card transactions have been growing more than 20 percent annually and have surpassed credit card transactions. The appeal is understandable. Debit cards are quick and easy to use. But using a debit card can cost you hundreds, even thousands, of dollars. We’ll show you why you should never carry a debit card.

More risky than carrying cash

In its 2007 Debit Issuer Study, PULSE EFT Association reported that U.S. financial institutions lost an estimated $662 million to debit card fraud in 2005. There is no end in sight. You’d be safer carrying cash. Although you don’t have much recourse if it’s lost or stolen, but at least your loss is limited to the amount of the missing currency. Carry a debit card, and you put the entire balance in your bank account at risk. If you link your checking account to your savings account to avoid overdrafts, you put the balance in both accounts at risk.

More dangerous than a credit card

If a thief gets your credit card, the federal Truth in Lending Act limits your liability for any fraudulent credit card charges to $50. You may not have to pay even that amount, as many financial institutions don’t impose any charge on their defrauded customers. And while the theft is being investigated, you can refuse to pay any part of the unauthorized charges.

Debit cards fall under a completely different law, the Electronic Fund Transfer Act. To limit your liability to $50, you have to notify your bank within two business days of discovering that you’re debit card has been lost or stolen. Wait longer than that, but give your bank notice of the fraudulent transactions within 60 days of when your statement is mailed and your maximum liability jumps to $500. Miss that deadline and you could lose all the money in your account.

Because the debit card accesses funds directly out of your account, you can be left without your grocery money while the fraud claim is being investigated.

The $350 taco

One trip to Taco Bell was enough to send Joseph Rizk’s checking account into freefall.

Rizk made the mistake of paying for fast food with his debit card. He figures he spent only about $5 more than he had in his account. Unfortunately, by the time he realized there was a problem the bank had hit him with about $350 in overdraft fees. At $25 to $35 per occurrence, it’s easy to rack up hundreds of dollars in needless NSF fees.  “I overdrew, and they pretty much pummeled me with charges,” said Rizk.

The Center for Responsible Lending, a consumer group, estimates that overdraft charges cost people about $17.5 billion each year. The center’s research reveals that about 45 percent of those overdrafts are the result of using a debit card or taking out cash from the ATM.

Banks used to refuse any debit card transaction that would overdraw a depositor’s account but not any more. Banks could warn depositors when their accounts are close to being overdrawn. But they don’t. Instead, most financial institutions automatically enroll their depositors in a program that loans them the amount of the overdraft–but at a steep price. The Center for Responsible Lending estimates that Banks that offer these lending programs can expect a sharp increase in overdraft revenues, as much as 200 to 400 percent.

Calculated as an interest rate, rather than a fee, the cost of these loans is astronomical. The average amount of a point-of-sale purchase that overdraws an account is $14.75. The average fee is more than double that amount. According to the agency, most consumers only use these loans for a few days. So on an overdraft loan, the annual percentage rate can be as high as 20,000 percent.

In defense of this practice, bankers like to point out that it’s the responsibility of the account holders to monitor their account balances and avoid overdrafts. Of course, that requires the account holder to know how much money is in their account.

(Scott Bilker is the author of the best-selling books, “Talk Your Way Out of Credit Card Debt,” “Credit Card and Debt Management,” and “How to be more Credit Card and Debt Smart.”)

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