Debit Card or Debt Card?

The New York Times has run an excellent article on the usurious overdraft fees charged by banks.  Overdraft fees on debit cards earn banks more than all credit card penalty fees combined.  For this reason, they are increasingly being relied upon by banking institutions as a strong source of income.

Unfortunately, it appears that many banks are now using these fees as their only real source of income.  When a user of a debit card has a purchase that exceeds the amount of funds in its corresponding account, it results in an overdraft.  The bank still pays the charge, and then charges the consumer roughly $40 in fees for every day and/or transaction that takes place until the account is again positive.

Essentially, banks use these overfrafts as a form of offering pay-day style loans at extremely high interest rates.

The article in the New York Times points out that the elimination of these fees would likely result in the immediate closure of hundreds of banks and credit unions.  As a result, most flat out refuse to permit consumers to turn off ‘overdraft protection’ even for mentally handicapped or disabled users.

The Times also offers a guide to avoiding these fees suggesting that consumers find a different bank if they are unable to disable the overdraft ‘feature’ on their account.  One item which the guide fails to mention, most large banks are willing to forgive a single overdraft fee as a courtesy, and may forgive even more if provided a reasonable excuse.

photo credit: B Rosen