The Hidden Trap In Debit Cards: Overdraft Fees

Debit cards are getting very popular nowadays as credit cards begin to lose popularity among American consumers. Credit cards have been constantly getting bad press ever since the economic crash exposed how fragile the credit card industry situation is. When the economic crisis happened, credit card companies almost went bankrupt as credit card holders found themselves unable to pay their balances and defaulted on their debts.

Now, credit cards are also getting bad press because of the recent astronomical rise of interest rates, the cutting of available credit to very low values, the increase of fees and addition of more fees and other such activities. As a result of these, many credit card holders have decided that getting a debit card is the answer to their problems.

Unlike credit cards which uses what essentially amounts to short term loans to cover purchases, debit cards are linked to a bank account where the card holder maintains a balance which is accessed and used every time the card holder uses the debit card. Generally speaking, it is a sound idea. A debit card would not carry the risk of going into debt because each purchase is essentially already paid. However, there are hidden trips that unsuspecting debit card holders could fall into. One particularly nasty one is overdraft fees.

Basically, a debit card holder is charged an overdraft fee when a transaction goes higher than the available cash in his bank account. The transaction goes through but the card holder becomes liable for the difference and is charged an overdraft fee.

The American Bankers Association recently made publicly available a survey taken from a thousand consumers. According to the study, 82% of those involved had not paid any overdraft fees in the past 12 months. Among those who did pay overdraft fees, 5% said that, in 12 month’s time, they had to pay ten or more separate overdraft fees. Most of those who had to pay overdraft fees said that they were happy that their transaction had been covered, even with the fees. The remainder said that they would have preferred refusal from the bank instead of overdraft fees.

Paying overdraft fees these days can be very expensive for a card holder, especially with the slow economy and the rising unemployment. Generally, overdraft fees are avoidable. However, to avoid getting overdraft fees, a card holder has to constantly check his account to be informed of the available balance. A better way would be for debit card issuers to inform the card holder of an impending overdraft, allowing him to cancel the transaction instead of getting hit with overdraft fees. There may soon be government legislation supporting this or something similar. In the meantime, debit card holders will just have to keep checking their bank accounts.