What Are the Dangers of Overdrafts on Debit Cards?

Plastic is convenient.

As the consequences of credit card debt become known, many consumers are turning to debit cards. While credit cards allow consumers to pay for purchases at the end of the month or over time (with interest), debit cards draw from funds that are already in a bank account. This gives consumers the convenience of using "plastic" without going into debt. However, when the funds in the account run out, the consumer may have an overdraft.

Debit Card Overdraft

Overdraft fees add up quickly.

It's easy to overspend when you use credit cards, but, even when you use debit cards, you can spend more money than you have. If you use your debit card without money to back it up, that is an overdraft. Banks vary in their policies, but you can expect to be charged fees from $25 to $30 per overdraft.

New Rules

New rules for banks when funds have run dry.

Every time you overdraw your account, your bank makes money by charging fees. This is why some banks have allowed multiple overdrafts on debit cards. Beginning in 2010, new federal banking laws regulate debit card overdrafts. Beginning in July (for new customers) and August (for everyone else), banks must refuse unfunded one-time charges unless the customer has agreed to allow overdrafts. This doesn't apply to scheduled, repeating charges.

Opting In

"Yes! I insist that you charge me fees!"

Under the new laws, overdrafts are permitted only if consumers "opt in" -- allow -- them. If you opt in, you may pay a fee for each occurrence of overdraft, or sign up to participate in your bank's overdraft protection program, which is usually another bank account or a credit account. There is usually a fee for the overdraft transfer, but it is significantly smaller than the overdraft fee. If you don't opt in, you'll be spared the fee, but may have the embarrassment of having your card denied.

Blocking

Your vacation will cost you more than you expect if you're not prepared.

Even if you have enough money in your bank account, you may incur an overdraft if some of your money is "blocked." If you used your debit card to book a hotel or car or reserve some other large charge, the company will probably put some of your money on hold. This way, it ensures that when the charge does go through, the money will be there to cover it. If you pay your final bill with that card, the hold will be cleared, but if you use a different card, the money may be unavailable for as long as 15 days.

Avoiding Overdrafts

Budgeting can be painful, but, in the long run, it's worth it.

To avoid overdrafts, be a good money manager. Track all of your purchases. Check your bank account every few days so you're aware of your balance and catch any surprises. Don't spend money you don't have. Create a household budget (easy) and stick to it (much more difficult).

References

• USA Today: Bank of America to Deny Debit Card Overdrafts
• Las Vegas Business Press: Overdraft rules Aim to Shield Debit Card Users From Themselves
• FTC: Credit Card And Debit Card Blocking

Resources

• Money Matters: Spending