Debit Card Purchases Trigger Overdraft Fees Before They Clear

by Steve Dasseos on August 6, 2008

Debit Card Purchases Trigger Overdraft Fees Before They Clear

By Kathy Chu, USA TODAY

For years, banks have charged customers hefty fees for overdrawing their checking accounts. Now a growing number of institutions are charging customers such fees even before the transaction overdraws their account.

Bank of America and TD Banknorth started doing it earlier this year. SunTrust, among other banks, has been doing it for a few years.

Here’s how it works: If you pay with your debit card, some banks will now charge you a fee of $35 or more if you don’t have funds in your account at the time you sign for the purchase.

Previously, you didn’t get charged this fee unless you were short of cash when the signature debit transaction cleared a few days later. That meant that, while the signature debit transaction was pending, consumers could often deposit money to cover any potential overdraft. (By contrast, PIN transactions typically clear immediately.)

Leslie Parrish, senior researcher at the Center for Responsible Lending, argues that this is “another way (for banks) to manipulate account holders’ balances to spur more overdraft fees.” Banks defend the practice, saying it provides customers with accurate information about account balances.

Banks’ changes come as regulators weigh whether to crack down on overdraft practices. The Federal Reserve has proposed a rule to give customers the right to demand that banks deny transactions that overdraw their account. The Fed has also asked for comments on banks’ processing of transactions from high-to-low dollar amount. This practice, according to USA TODAY research in 2006, often triggers more overdraft fees than if banks paid the transactions in the order they were received.

In 2007, banks collected a record $45.6 billion in overdraft fees from consumers, up 50% from 2001, according to Moebs Services, a consulting firm. To minimize fees, consumers should keep track of their account balances and seek out small banks, which often have lower fees, says firm founder Michael Moebs. Still, he adds, as fees climb, “there’s a point when consumers say enough is enough, and I think they’re saying that now.”

Source: USA Today

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