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.
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.
Joel, I've never used a debt card, for the very reasons that you have outlined here. People can say what they want about credit cards, but if used with a little common sense, they are much safer (and less costly) than debit cards.
Great Article! It is a fairly recent development that banks are starting to let debit card transactions overdraw an account. They used to just reject the transaction as a credit card would. However, recent problems with banks have left them scrambling for ways to make more money. Plus, consumers are starting to get educated in realizing how credit cards are tricking consumers into debt with an agreement chucked full of tricks and traps, and are getting out of debt and using debit cards instead. Historically, banks have received 75% of their profits from credit card fees and excessive interest charges (source: ABA). With consumers being more careful now, they are going back to annual fees, and/or are trapping them with debit card transactions that overdraw their account.
There is a way to fix this. The banks automatically open an invisible credit line with each checking account (this should be illegal), that allows overdrafts (they say for the convenience of the customer). You can request that this credit line be closed and that your transactions that overdraw not be paid. However, they will still charge the overdraft fee. You can fight the fees. But another way to deal with this is to open an account at a Credit Union. They are non-profits, and are owned by the members. A good one does not handle debit cards as discussed here, if you request the credit line for overdrafts be closed and your debit card transactions be rejected if they overdraw your account without a overdraft fee. My credit union does this. You can also process your transaction as a credit card - you have that choice with the merchant. It processes differently.
Debit cards give you more control, where credit cards just create more debt. Though lately banks have been looking to debit cards for profits. I've been researching this and living it for many years. Check out my profile and my website for more on what I write about.
Oh, BTW. Here is a statistic you might find interesting on the revenue of credit card companies that I found in Elizabeth Warren's testimony before Congress in January of 2007.
Interest $71.13 billion
Interchange fees 20.62 billion
Penalty Fees 7.88 billion
Cash-Advance Fees 5.26 billion
Annual Fees 3.26 billion
Enhancements 0.85 billion
Total $109.00 billion
Source: Cards & Payments, reproduced in Bank Card Profitability, 2005-2004, CardWeb (2006)
Great article, and let me add another oddity - I recently closed a checking account with Bank of America. AFTER IT WAS CLOSED they allowed a check I'd written (and forgotten about) to come thru. I was hit with the $25 check amount AND a $35 overdraft fee. I don't even know if it was legal for them to do this, but they did it. A day later, and automatic withdrawal I had scheduled for my cell phone account also came through. Another $135 AND a $35 fee. I'm still in negotiations with them about this, no idea how it will play out.
» left by Roy Ellis from Republic Sentry Party (30 days 3 hours ago.)
Joel, very informative article and some good posts. I've never had a debit card, see no use for them at all. Never use an ATM or conduct any transaction that would result in a fee on my CC. Always pay off the full credit balance with each bill thus, never paid any interest on my CC billings. Just don't understand why people are so reckless with their money. And, while I do believe in regulation of the financials, such as having a 10% usury law for CC's, I don't believe it is governments responsibility to babysit the public in managing their finances. Last evening, On Suzy O', a young woman, with two degrees from Penn. St., was discussing her $35k of CC debt while complaining of trying to pay the debt down even as she spends over $400 monthly on dining out. Apparently sending folks to college for an education is not what it used to be. In summation, I am equally upset with the public and government. We have just witnessed the greatest transfer of wealth in the history of mankind, some $7T dollars, and folks are just ho-hum. Same for getting ripped off by the financials, ho-hum. Same for the publics interest in a third party for a solution to our many problems, ho-hum. I do believe the response to your article will also be, ho-hum.
Roy, I truly agree with your sentiments. I too have always paid off my credit card charges to avoid interest. I think I have a most unusual claim to fame: I HAVE NEVER USED AN ATM! I too am disillusioned with most Americans, both their thinking (or lack of it) and their behavior, as well as with our government. I pity young Americans and the economic disasters they will face for the rest of their lives. Having just turned 70 and achieved old geeza status, I have little hope of seeing my country regain its greatness, but I will keep working on various attempts to improve our nation and government.
» left by Roy Ellis from Republic Sentry Party (29 days 20 hours ago.)
Joel, I'm about half way through Pat Choate's latest book, "Saving Capitalism". In a couple of hundred pages he is able to put the whole political landscape into perspective. Recommend it to all in preparing for the next revolution.
Very informative article. I don't care for credit cards. They've gotten me in trouble in the past. I use a debit card all the time. However, I rarely use my banks. I only use my bank if I *have* to write a check. I use PayPal's debit card. They don't let me overdraw. I know they have their pros and cons too, but so far, I've been pretty happy with them.
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