DebtGoal founder Scott Crawford just alerted me to a New York Times piece that explores a financial issue that has gone underreported: the pitfalls of debit cards.
Debit cards at first glance appear to be safer than swiping credit: the danger of running a balance in the red is not possible from a revolving standpoint. But times have certainly changed and two words sum up the biggest trick with debit accounts: “overdraft protection.”
Overdraft protection got its start as an optional feature for debit card holders to protect against one-time overdraws against an account that would rarely happen. The fees associated with the protection were modest. Today, overdraft protection is more expensive than in the past, but the fees associated with going overboard nowadays have resulted in nothing short of a cash cow effect for banks. The New York Times article describes a scenario that we’ve covered before: small overdraft instances with fees many times the overdraft amount levied on consumers. The chilling quote from the article is certainly, “… banks now make more covering overdrafts than they do on penalty fees from credit cards.”
What is someone in debt to do? Consider the following:
- check your debit card account immediately since some banks automatically enroll customers in the sneaky programs.
- Cancel the overdraft protection: simply allow your debit card to be denied at a point of purchase if you have insufficient funds. You will save a ton of money – savings that, after the momentary embarassment at checkout, can ironically mean the difference between sliding into debt or staying in the black.
- Check your debit card spending across a month. What percentage of your total monthly spending comes off of a debit card? A credit card? In cash? From writing checks? Debit cards are dangerous because you do not “feel” the surrender of physical money at the point of purchase, which, according to research, encourages you to spend more. Switch to paying for things with cash to reduce total spending.
In short, debit is much better than credit, in part because the individual feels the hard end to their spending capacity with either monstrous overdraft fees or a simple “deny” at checkout. But why provide oneself with a false sense of security through expensive overdraft protection services? “Overdraft protection” plans should be renamed the “Save Face at the Point of Purchase and Spend a Lifetime in Debt” Program.
Raj Patel writes for DebtGoal.com, a do-it-yourself system for getting out of debt and lowering your interest costs. DebtGoal.com incorporates all of the techniques discussed in this post and can help users understand and get visibility to and manage their debt finances.
Tags: debit card pitfalls, debit card problems, debit cards and debt, overdraft protection
