Overdraft Protection Can Be Costly

April 2, 2009
Special Feature

The idea behind overdraft protection sounds good. But as more Americans use debit cards instead of writing checks, their grasp on their bank balances is getting looser and the result has been a blizzard of overdraft charges.

The idea behind overdraft protection sounds good. You will never bounce a check and you will never have to worry that a debit card purchase will be rejected because your bank account is empty. But as more Americans use debit cards instead of writing checks, their grasp on their bank balances is getting looser and the result has been a blizzard of overdraft charges.

With overdraft charges averaging $27 on each purchase, using a debit card when your account is in the red can add up. The problem, say consumer advocates, is that there’s no alert issued when a bank account runs out of cash. Debit card purchases sail through and the buyer gets whacked with a bank fee on each purchase made while the account is overdrawn. Banks are the winners, racking up $36.7 billion in overdraft fee revenue last year, about 75% of their service charge income.

Tip: When in doubt, check your account balance online before going out to shop.

The Federal Reserve is looking at regulations that would require banks to notify buyers when a debit card purchase would result in an overdraft fee or to opt out of overdraft protection. Banks claim, however, that the technology for such an alert system doesn’t exist, since most debit card purchases are processed by a third party that has no access to account information. Ending overdraft protection charges could also mean the end of free checking, since banks are likely to make up for any lost revenue by going back to monthly checking account fees.