Tuesday, September 15, 2009

Debit cards and overdraft fees

Last night there was a story on NBC news about a young soldier, Private Cid, who was having problems with his bank debit card. Since a couple of my family members recently had similar problems, I felt like it was time to speak out. I did some research and found some potential answers, political and practical. This may be long, but I encourage you to read on.

It seems young Private Cid uses his debit card daily for a lot of small transactions. In fact, the video story can be found at this site (I just rewatched it) and it says the average debit card transaction is under $20. In one day Private Cid had five such transactions, for pizza, sandwiches and such totaling $33.41. Trouble was, he didn't have the money in the bank and encountered $175 in overdraft charges. In a single five month period, he had total overdraft charges of $1785. For a young army private, that's more than a month's salary.

Now the individual in this story is an army soldier which brings a special feeling of patriotism (no mention was made of where he's serving). But this could easily apply to my son or my daughter. And since I know a few people who recently faced similar situations, I paid special attention. Overdraft fees are a "cash cow" for the banks and they will make over $27BILLION with these fees. I can be somewhat cold sometimes (my kids think all the time) and I think the bank deserves to make a profit, but they don't have to make it all on me (or my family).

There are some proposals that may change the way these overdraft fees work. I tend to favor less legislation, but in this case, the banks have not been playing nice (even if they've been playing by the rules) and it's probably time to change the rules. However, changing the rules won't be 100% in favor of the consumer and the consumer is bound to lose some in the deal. For example, banks claim they pay these over-charges as a courtesy to consumers and that "6 percent of consumers were glad their charges were paid, despite the overdraft fee." Overdraft fees only affects about 18% of Americans (details on the legislation and the source for this is here -- do I get bonus points from liberals by quoting a newspaper with "democrat" in the name?).

But if you're counting on the government to bail you out of overdraft prison, you might be stuck for a while. So I have a simple solution and some alternatives to help you in the mean time. They do require a little discipline and I know that's hard to come by these days. One simple solution is to keep track of how much money is in your account and never go below $0. Only the government can keep spending when the balance reaches $0 and if you're not printing money in your spare room, you can't get away with it.

Another solution is to "hide" some money in your account. The amount depends on the most you charge in a given day. Say you regularly charge about $33.41 in a day like Private Cid. You put an extra $35 in your account and mentally subtract that from the balance each time you check it. For easier math, just make it $100. Then when your balance goes below $100, you think "Oh No, I've overdrawn" and you put it back. This requires some extra discipline because you have to make it a practice NOT to spend that $100.

Traditional banks sometimes offer "sweep" accounts, where you can have money in savings and have it "sweep" to checking when you overdraft. This, or a line of credit, will effectively do the same as "hidden" money. But these aren't always available to everyone.

Finally, I'll mention a new, high-tech way to help. This is especially relevant to the two people I know who recently had over $100 in overdraft fees, but also relevant to everyone. My bank of choice is BB&T. They offer "Alerts" on their website. In fact, I just signed up for alerts myself. You go to the website and specify that you want to be notified when your balance drops below a certain level (I chose $100). You can have it alert you when a deposit is made, or when a check clears. You can have it alert you when you get an NSF charge (that way you can STOP SPENDING). You can even have it send you your balance each day so you know how much you have to spend.

BB&T alerts are free and can be sent to your email or even your cellphone (normal text rates apply). You can specify what time of day the alerts are sent so you don't get woken up at 8am every day. While I don't intend this as a commercial for BB&T, I strongly encourage everyone (especially overdraft prone people) to find out what their bank offers.

* Update - my editor in chief (wife) pointed out that this doesn't always take in to account pending transactions. Also, I noticed that some alerts don't come out on weekends and holidays. You still have to have some personal responsibility. But this can help you manage your account.


Katie Pennington said...

These are all things that I would agree help, but at the same time, if you are irresponsible enough to make these mistakes over and over, you are irresponsible enough to not pay any attention to the alerts and so forth. So I would add in there that this is good for everyone, but for people who are overdraft pron, they should start using the envelope system until they get proper check book ediquite! The envelope system works really well for me, however you have to know how much cash to carry with you everyday so you don't make 20 trips back to the house!

Glenn E. Chatfield said...

I was just going to say that it is much easier if you just keep track of how much you have in the bank and don't write or debit for more than you have. DUH!

"The Edge" said...

Having run into this situation myself a time or two, I have the "sweep" situation setup just in case. But I've also learned that you can argue with the bank on these things and you can get some of your money back. The premise is the following:

You start the day with $100 in your account. You write a check to someone, and buy gas for your car, and now you really only have $20 in the account. But, since the check to your friend hasn't cleared yet, the bank says you have $75 in the account. This is called "floating", and where most folks get in trouble. They go spend up to that $75, the check clears, and bammo - they are overdrawn.

What happened to me was a little different. Let's say I have $100 in my account, and I go make $70 in purchases on my debit/check card. Depending on where you make them, they either come directly out of the account or they don't. But the bank still puts the money "on hold". So then the bank says you only have $30 dollars to spend even though your ATM machine says $60. Here's where it gets confusing. That same night, a check I wrote three weeks ago finally clears, and now the bank says I am overdrawn by $20. But, my account still has $10 in it. The problem is, the bank has already subtracted the amount "on hold" from the $10 to tell me I'm overdrawn. But in my case, I have the bank "sweep" my savings to prevent the overdraft fee of $25. Which is good. But, for this service, I am charged $10. Not great, but at least it is better than $25. So what does my bank do? They sweep $30 from my savings into my checking. Why $30? Because 10 is to cover the overage, 10 is the overdraft sweep fee, and then they add an additional 10 because you can't keep a zero balance. So what's my actual balance now? Well, according to the bank, it's +10. But if I go out to the the bank website on-line, it says $40 - how can that be???? Wait, it gets better. The next day, another new debit clears for $12. Bammo - I get hit with another sweep overdraft fee and they move $30 more into my checking (12 for the money due + 10 for the fee + they round up to the next 10), leaving me 8 dollars in the account. But at the same time, none of the holds cleared, so the website says $38. So now, on consecutive days, I have been hit with sweep overdraft fees of 10 dollars and 10 dollars. Well, this set me off, and I called the bank on this one. The first guy I talked to wouldn't listen to common sense. I said to him, look - you are charging me an overdraft sweeps fee for money you did not even take out of my account. If you didn't take it out of my account, then I wouldn't have been overdrawn again. I said - look, I'll buy the first $10 fee because I see your math and how you got my balance below zero. But look, if your'e not going to take the money out of my account, you can't very well charge me the 2nd overdraft fee because the money was there to cover the second check (the $12 check in my example). You can't hit me on both days. You can only have one overdraft, because you didn't take the money out of the account. I finally got a second lady on the phone and explained the same thing, and she agreed with me. So the moral of this story is this - if you can do simple math, and explain to the bank what their own website says you have in the account, they are going to be hard pressed to hit you for overdraft fees on consecutive days if they don't take the money out of your account which is causing you to be overdrawn. Stand up for your rights as a consumer!

Now, I only got $10 back, and it cost me a good bit of time on the phone (maybe an hour), but I felt so good when I got done because I had "beaten" the bank with their own rules.

And my wife can verify this too, because she was in the next room listening to me tak to the bank person, and thinking, they don't know who they're dealing with.....

Glenn E. Chatfield said...

It still comes down to knowing what you actually have in your bank, and not even getting close to zeroing it out. I have never in my life - even at my poorest moments living payday to payday by the skin of my teeth - have overdrawn. It is simply being responsible for what you have or haven't got in the bank!

Tipper said...

Good tips. I don't use a debit card-but my husband does-and he doesn't always remember to tell me about every charge-so I keep track online-so our checking account isn't surprised : )

Randy said...

Katie, the envelope system is good. You still need to exercise discipline not to "borrow" from another envelope. I'm glad it works for you.

Glenn, a good idea to write down everything you do. Unfortunately, a lot of folks don't have that discipline. When I was a teenager, my balance got down to 43 cents one time, but I knew that I had 43 cents. There was no doubt in my mind. And I stopped writing checks until I put more in there.

Edge, Yes, you can negotiate away charges. But I'm told from some reliable sources, you can only do that once. Be careful.

Tipper, the dangers of two people using the same account. Glad you can access online to watch the account..

Anonymous said...

i use a metal debit card, its a lot harder to overdraft than those plastic ones.

Randy said...

Anon, it took me a little bit to understand what you meant about a metal debit card. I'm assuming you also have some folding debit cards?

Devid said...

Here is lots of useful information about debit cards also you can directly apply for prepaid mastercard, compare credit cards and prepaid debit cards.

Randy said...

First, thank you for your comment on this old item. I hope the moderation didn't hold it up too long.

Others, I checked David's link and it appears to be legitimate. I offer no comment on it's accuracy, but it looks good, although it is mostly UK driven.