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Debit Cards for Dummies

I must confess that I never understood why it made any sense for consumers to use bank debit cards rather than credit cards. Debit cards, sometimes called bank or check cards, provide a tremendous benefit to banks because when you use them the money in your checking account gets hit immediately. Whereas with credit cards you essentially are borrowing money and have some time to pay it back without incurring any interest or fees. Credit cards also provide far more protection against fraudulent use of them than do debit cards.

Now it turns out the debit card users have been seriously abused by nearly all banks. Banks learned how to make huge amounts of profits. Rather than simply reject use of a debit card if there are insufficient funds in your checking account, they let the transaction occur. Then they hit consumers with an overdraft fee, which is really hefty, often $35 for each overdraft.

Being the abusive monsters that banks have become, they discovered various ways to really screw consumers. They used their power to let transactions happen even though an account had insufficient funds without any prior approval from customers that they wanted overdraft protection. This allowed banks to keep hitting people with many overdraft fees long before a customer became aware of what was happening.

As if this was not enough for them, banks also used their electronic power to set the chronological order of transactions. Why do this when you would logically expect your charges to be recorded in the same time order that they occurred? Banks learned that if they hit your account first with the largest amount charged, then a number of smaller charges, actually incurred earlier, would trigger an overdraft fee for EACH of them. If the small charges were recorder earlier and the largest charge later, then perhaps only one overdraft fee would hit the customer.

The net result of this abusive bank behavior is that a series of relative small charges on debit cards, perhaps just a few dollars each, would EACH be hit with a $35 overdraft fee. Sounds like something an awful criminal might do to innocent victims. ATM withdrawals on debit cards are handled the same way by banks. In one day a person that has not paid enough attention to what has been happening to their checking account can get hit with many hundreds of dollars in overdraft fees!

Many Americans have discovered that they never have a way of requiring their banks to stop allowing charges or withdrawals if their account has insufficient funds. In other words, the banks insist on providing the "service" of extending funds beyond what is in an account so that they then can hit people with large overdraft fees.

Just how much money do US banks make from this abusive overdraft fee business? Try $27 billion this year from their debit card and checking accounts. That is in addition to $11.5 billion they hit consumers with for bounced checks and other instances in which banks do not provide overdrafts. To see just how significant this is, note that banks will make $20.5 billion from all sorts of penalty fees on credit card accounts. That does not include the billions made from interest charges on credit card accounts.

You probably are thinking: Well consumers not smart and diligent enough to pay close attention to the checking accounts deserve to be hit with such onerous overdraft fees. And there is some truth to this view. Of course, in our society there are an awful lot of people who are not very intelligent, or are extremely busy trying to survive, or just plain distracted by all kinds of life burdens. Indeed, 93 percent of all overdraft charges come from just 14 percent of bank customers who exceed their balances five or more times in a year. A hefty fraction of these people are lower income Americans.

This whole debit card overdraft fee situation has finally become so recognized that Congress is considering some legislation to stop the bank abuses. But of course the powerful banking industry is willing to spend a fortune on lobbying Congress to prevent legislation protecting consumers. Clearly, a number of regulatory agencies have not acted on behalf of consumers for many years, despite knowing about all the abuses. The very least that Congress should do is require banks to get explicit customer approval for providing overdraft protection on debit card accounts, to disclose what the fees are, to prohibit any practice that banks use to order charges in ways that maximize overdraft fees, and to put a cap on overdraft fees.

Enough corporate raping of American consumers that have witnessed their taxes going to bail out banks that just turn around and fleece consumers. There really is no reason to use debit cards if you can use credit cards, checks or cash.

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Joel S. Hirschhorn has succeeded as: a full professor, University of Wisconsin, Madison; a senior staffer, U.S. Congress (Office of Technology Assessment); head of an environmental consulting company; Director of Environment, Energy and Natural Resources, National Governors Association; now an author and consultant. Recent books are: Sprawl Kills - How Blandburbs Steal Your Time, Health and Money, and Delusional Democracy - Fixing the Republic Without Overthrowing the Government. He has published hundreds of articles in newspapers, magazines, journals and on many web magazine sites. He has given hundreds of talks at a wide range of conferences worldwide. He focuses on American culture, politics and government, and health issues.