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More banks are denying debit card overdrafts

March 10, 2009
Overdraft Loans


And guess what! That's a GOOD thing



Good news! Bank of America has announced it will stop its costly, automatic approval of debit card and ATM overdrafts.


Bank of America joins Citibank in covering debit card and ATM overdrafts only if their customers have signed up for more reasonably priced coverage, by linking their savings or line of credit to their checking account.

Q: Why is this good news?

A: Three reasons:

1. No more surprise high-cost overdrafts at the ATM or checkout for customers of these banks. These two banks are so big, the announcement means one third of debit card transactions made each year will not be subject to these high-cost fees.

2. Since Bank of America and Citibank are doing it, more banks and credit unions may follow in order to stay competitive.

3. This is a very good indicator that the big national banks are hearing your concerns about unfair overdrafts.

Q: What happened to the debit card as a smart, safe financial tool?

A: The banks pulled a bait and switch by changing their debit card policies.

Debit cards were meant to offer the safety and convenience of a credit card without the danger of going into debt. But millions of Americans have lost money when they were surprised by an overdraft fee – or several – averaging $34 for debit card purchases which they thought they had the funds to cover.

As recently as 2004, 80 percent of banks and credit unions routinely denied debit card transactions that would have overdrawn their customers' accounts. Many Americans counted on this backstop as they made small, quick purchases, trusting that if their balance fell below zero, their card wouldn't work.

In a complete reversal, today the large majority of customers are enrolled in overdraft programs where debit card and ATM overdrafts are routinely approved, even when their customers don't have the funds.

Automatic approvals are costly.

This so-called service does not save customers any money. When your debit card transaction is denied, you pay no fee at all. Approving the transaction saves you nothing, and in fact, it is very costly.

The average shortfall triggered by a debit card transaction is $17. So essentially the bank is charging $34 for a $17 loan that will be paid back in just a few days, when the customer makes another deposit. Overdraft fees beget more overdraft fees by putting customers further in the red, which makes future transactions more likely to bounce. Banks and credit unions collect $24 billion per year in unfair overdraft fees, with about half of those triggered by debit card and ATM transactions alone.

Consumers would rather be denied.

A CRL survey found that 80 percent of consumers would rather have purchases of $5, $20 or $40 denied if it would cost them a $34 fee. The average debit card shortfall is only $17.


While recent Federal Reserve rules will require institutions to get customers' permission before enrolling them in an overdraft system for debit card and ATM transactions beginning this summer, the rules say nothing of the amount or frequency of the fees institutions can charge once a customer has opted in.

The rules fail to adequately guard against deceptive tactics financial institutions are already employing to lure customers into opting in. And they fail to stop institutions from manipulating the order in which they post transactions to maximize overdrafts.

Many banks and credit unions enroll their customers in this expensive overdraft coverage as a default, without allowing customers to make a clear decision that they want small purchases approved, even if it means paying a $34 fee. Some banks don't even allow customers to opt out of this system.

Take action to make overdraft practices fair.

Proposals in Congress would make fees reasonable and limit the number banks can charge, as well as ban unfair practices like re-ordering debits to increase overdraft fees.