Banks earn more money from debit card fees than credit card fees and they often manipulate usage patterns to maximize their profit – and our pain, says a front page story in today’s NY Times.
“Banks will let you overspend on your debit card in a way that is much, much more expensive than almost any credit card,” said Eric Halperin, director of the Washington office of the Center for Responsible Lending.
The problem is that banks charge you an overdraft fee when you spend more than what is in your account, instead of denying the purchase. Three-quarters of the largest American banks automatically give consumers overdraft coverage, excepting Citigroup and INGDirect.
By calling this service overdraft “protection,” banks emphasize the benefit to consumers (being able to spend more than you have), while de-emphasizing their gain (charging outrageous fees for lending you what you the moolah).
Regulators and lawmakers are working to help consumers, but in the meantime, ahem, here are seven things you can do to reduce your debit card fees, the story says.
- Call your bank and ask them to turn off the overdraft protection on card transactions. Ask if this step will also disallow checks, ATM withdrawals and automatic bill pays to go through if they take your balance below zero. These are additional ways you can incur fees.
- Create a cushion, be it $100, $500 or $1,000, if your bank does not let you turn off overdraft protection. Some, like Bank of America or Wells Fargo, “generally won’t let you switch” it off, the story says. My Mom used to keep $300 extra in her checking account that was not reflected in the balance on her check ledger. So when she went negative $15, say, she actually had $285 left.
- Find a new bank that allows you to NOT have overdraft coverage. Try a smaller bank or credit union, and be sure to ask more than one person at the new institution to make sure they don’t have overdraft coverage.
- Get a line of credit at your bank that will kick in if you go below zero, instead of overdraft coverage. With a bank line of credit you will pay an interest rate on whatever you borrow beyond zero, instead of a $30 or $35 fee whenever you dip below zero.
- Connect a back up savings account to your checking account. If you overspend, the bank will take money from your savings to make up the difference. PNC Bank’s Virtual Wallet lets you link two accounts to your main account, the story says.
- Set an alert so you know when your balance is getting low.
- Consider a credit card – if you weren’t running away from credit in the first place!
Read the whole story here.