Why opting out of debit card overdraft coverage is a good idea

a woman at an ATM

Banks don't want you to opt out of debit card overdraft coverage, because they make fat profits by charging customers debit card overdraft fees. Flickr photo.

If you’re like most people, you have a debit card. By now, you should have gotten a letter from the bank asking you if you would like to continue with the bank’s standard overdraft coverage. This letter is a result of new credit card rules that require banks to ask you if you would rather opt out of paying for an overdraft and just have your purchase declined. Consumer complaints about spiraling bank overdraft fees helped spur the change in regulations. If you haven’t made your decision yet, keep in mind that banks are selling the service for one reason: they make money doing it.

Debit card overdraft coverage is a scam

When debit cards came into vogue, Jeff Gelles at the Philadelphia Inquirer reports that banks saw big money to be made by confusing consumers about the difference between debit and credit cards. Debit cards draw on money in your checking account. When you use your debt card and there’s no money left, overdraft protection charges debit card overdraft fee to make the purchase. That’s where the “$40 cup of coffee” came into being. If you’re short of cash, it makes more sense to get a payday loan than to let your bank rip you off with debit card overdraft fees.

Biggest bank admits overdraft coverage is bogus

Gelles said you should decline your bank’s offer to extend overdraft protection. Even Bank of America thinks that’s good advice. In March Bank of America announced that it will do away with debit card overdraft coverage. The New York Times reports that the decision could cost the bank tens of millions a year in revenue from debit card overdraft fees and put pressure on other banks to do the same. Debit purchases account for roughly 60 percent of overdrafts at Bank of America, the nation’s largest issuer of debit cards.

Bank overdraft fees get out of hand

Debit card overdraft fees can easily get out of hand because the offending transactions go unnoticed. Gelles said the Starbucks barista doesn’t say, “You know this is an overdraft, don’t you?” so when you get dinged once, you may get dinged again and again until you realize what’s going on. There are no legal limits to how many times you can get penalized. Wachovia will charge you for up to four overdrafts, or $140, a day. Citizens Bank will charge up to seven at $37 apiece, or $259.

Avoiding bank overdraft fees

The new credit card rules about bank overdraft fees draw attention to the problem that too many consumers are poor managers of their checking accounts. In a press release, Michael S. Kappas, President and CEO, Apprisen, offers tips for avoiding overdraft fees or the embarrassment of having a purchase declined:

1. Remember your true account balance is in your check register, not on your ATM slip.

2. Keep track of all deposits, withdrawal slips and purchase receipts. Record them in your check register.

3. Know your checking account balance before you make a debit card purchase or ATM withdrawal.

4. Balance your account at least once a month.

5. Put “ghost” funds in your checking account. Deposit a few hundred dollars and don’t record it in your register. Don’t forget to account for the ghost funds when you balance your account.

6. Talk to your bank representative about your options for avoiding all potential overdraft situations.

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