What, me worry? The bank says it’s OK…(How debit cards might not help so much)

Real comment made by a friend of Consumer Courage about his daughter who is running loose on a college campus somewhere in this great land of ours:

“I can’t wait to see the statement every month for her debit card. There’s a $1.69 charge to [the local gas station] for a pack of gum; a $3.19 charge to [the local coffee establishment] for a latte; a $2.39 charge from [the local drugstore] for who-knows-what……” 

You get the point.  Somewhere along the line, actual money stopped being used as a tool for commerce.  While my friend’s daughter is creating an accurate record of her spending habits, she’s not doing anybody any favors by using a debit card.

Debit cards come in two forms: 1) what is called “pre-paid, reloadable” and; 2) a “check card” which is what most ATM cards have turned into.  Check cards are ATM cards that have the ability to be used as debit cards, depending on your preference.  They both work the same way – just swipe and you’re done!  Most of the time if you are just swiping the card to buy something, you won’t have to enter a PIN.  Both can be used to withdraw cash from an ATM machine.  If you’re getting cash, you will almost certainly have to enter a PIN. 

We’ve already warned everyone about the havoc that can be wreaked on the college set by those darn overdraft charges.  What we haven’t discussed is the trouble that you can get into if you use your debit card like it’s a portable cash machine.  Not only do a few dollars here and a few dollars there add up to hefty balances by the end of the month, debit cards have their own set of nasty side-effects that many of us are not familiar with. 

And before you say “Whatevs. I don’t have a debit card and I won’t ever get one!” think about how much the debit card market is growing.  In 2012 about 12 Million Americans load $65 Billion dollars onto debit cards.  By 2017, that number is expected to grow to more than $300 Billion. 

“You get a Fee!  You Get a Fee…..Everybody gets a Fee!”

Remember when Oprah gave cars away on her show?

Editor’s spoiler: Remember when all of those ladies got a letter from the IRS telling them that they had to pay $7,000 in taxes because those new cars all counted as income?

I’ve never been to work for a company that sells debit cards, but I wonder what the scene is like at the end of every month when they see how many people purchased new cards.  It probably doesn’t take long to figure out how much in fees the company is going to make off of those folks by the end of the year.  I can just imagine the folks who get bonuses at the Debit card company hollerin’ and high-fivin’ each other “Everybody gets a Fee!” 

If you use a pre-loaded debit card, here are some of the fees you’ll have to pay:

There’s fees-a-plenty when you use a debit card.  What the banks are hoping is that you are so enamored about that fact that you don’t have to use cash, you forget about the fact that fees even exist.  Here’s what you’re missing:

  • Activation fee
    • This is charged every time you want to put money onto the card – usually a percentage of the amount you want to load and is really just a fee so you can let them hold your money until you spend it;
  • Balance inquiry fee
    • This is charged every time you ask for the balance on your debit card and is really just a fee so you can ask them how much of your money they still have in their hands;
    • If you don’t have overdraft protection (that’s when they pay for a purchase you try to make when you have no money left on your card) it’s not so important to check the balance. 
      • Of course, you could always just write down the amount you spend and keep track of how much is on the card (But, you’re an adult.  Who am I to tell you how to take care of your money?)
  • ATM usage fee
    • This is charged every time you get money from an ATM that is not in their network and is really just paying them for the right to let you use the money that is already yours.
    • It’s a good idea to memorize which machines are “in your network” and use only those machines when you want cash.  If they don’t have any ATM machines that are “in your network” (which means it will always cost you a fee to get cash) you should think about getting another debit card. 
  • Overdraft fee
    • This is charged when you try to buy something that costs more than what you have left on the card.  Many banks will cover this new item and then have you pay them back at a hefty interest rate.
    • You’re better off if you tell them NOT to give you overdraft protection.  Most people would rather have the bank say “transaction denied” than “transaction granted. Now you owe us an extra $35.00)

Sorry you lost your card.  We can send you a sad look if that would help

If you lose your debit card your money is in trouble.  Because you don’t have to enter a PIN into the swipe machine to use it, the card can be used by anybody.  If you lose your debit (or ATM) card, the first thing you should do is call the company that gave you the card (this is the name on the back of the card, not the place where you bought it).  Tell them that you lost your card and give them the number.  The law treats lost debit and ATM cards the same way.  If you tell them that you lost the card, they are supposed to cancel the card and issue you a new one. 

Do I lose any money if I lose the card?

That depends on when you reported that you lost the card.   If you lose a debit (or ATM) card and tell the bank that it was lost:

  • Before anybody can use it, you                                                                             don’t lose a penny.
  • Within two days of the moment you realize it’s lost,                                       you lose Fifty Bucks;
  • More than two days (but less than two months after you get                                                                                   the statement that shows the charges that were not yours)                        you lose Five Hundred Dollars;
  • More than 60 days after you get the statement that shows the                                                                              charges that were not yours                                                                                you lose all of your money.

Of course, this only works if you wrote down the account number on your card and the number of the bank that gave it to you.  If you didn’t write down the account number, whoever finds the card gets an early birthday present.  The biggest difference between debit cards and credit cards is that the potential liability with credit cards is capped at $50 as long as you report when it is lost or if you find an unauthorized charge on your bill. 

Should I be scared?

You tell me.  (Actually don’t tell me. I’m scared enough as it is.  I once had a job interview that scared me) Should you be scared from using a debit card? Let’s put it this way. Of all the articles on the web about debit cards, the ones that say that you SHOULD use a debit card are almost all from the banks that issue the cards.  The rest are a study in how to write a “how-not-to-do-this” article.  How many places should you avoid using a debit card? It’s up to you.  You can avoid using a debit card at: three places ; four places ; five places ; six places ; seven places ; eight places or ten places .

Editor’s Note: We couldn’t find 9 places to avoid using a debit card or 2 places. But, we did find 2 reasons why you should NOT use a debit card at a gas station  so we suppose that counts. 

How to care for your very own debit card

If you must use a debit card, keep these thoughts in mind:

  • Write down the card number and phone number of the bank – then put them in a place that is nowhere near the debit card.  Since calling the bank right away is the only way to save your cash if the card is lost, having this information safe and sound is the second most important thing you can do. The most important thing you can do when you buy a debit card is NEVER GIVE THE CARD TO ANYBODY ELSE or tell them your PIN.  Let’s practice:
    • Your best friend says “Hey man. I forgot to go to the bank. Can I use your card to buy some waffles?”
      • You say “No!”
    • Your girlfriend says “Hey man. I really want a burger but, I’m out of cash. Can I use your card to get some money?”
      • You say “No!”
    • Your professor says “Hey man. I am dying for a snickers. If you give me your debit card, I’ll give you an A on the final.”
      • You say “No!”
    • The Dalai Lama says “Hey man. If you lend me your debit card, I will pay you back AND give you the secret to a happy life.”
      • You say “No!”
    • ……………See a theme here?………..
  • Look at the statement every month – Also a must.  This is important no matter what kind of card you have. (Debit, Credit, ATM, library) Not only does this limit your liability, it helps you keep an eye on your spending habits and balance.
  • Do NOT write the PIN on the back of the card – do we really have to tell you this?
  • Keep track of every purchase you make – two of the biggest (and most popular) debit card charges are avoidable.  They are balance inquiries and overdraft fees.  If you keep track of the money you spend, you can avoid both of these.  The Consumer Financial Protection Bureau did a study about debit cards and usage trends among the college crowd.  The median overdraft fee on Debit cards?  $34.00.  How much were college students spending when they got hit with that thirty-four dollar fee?  Less than $24.00.
  • Maybe use cash to buy that pack of gum – Debit cards are marketed as an alternative to cash.  They’re convenient and you don’t have to fumble around with bills when you want to pay for something. However, there are a few drawbacks if you stop using cash.  For starters, you open yourself up for some of those nasty fees that we’ve been talking about.  You might try to buy something when your account is close to zero (which is a fee) or you might need to check the balance more often (another fee). 

Not worried enough about debit cards? 

How about the fact that you will save money by using cash?  It turns out that if you use plastic to pay for everything, you will end up spending between 12 and 18% MORE than if you paid with cash.   Using plastic allows us to trick ourselves into thinking that the money is somehow not quite as real as cash.  Impulse buys are more frequent and we say “I’ll take one of these too,” a lot more often if the only thing we part with at the register is our little plastic card.  (they even give it back to you!) If you MUST have that debit card, try going to the ATM machine that doesn’t make you pay a fee and taking out some crispy new bills and use those to pay for things. After all, the best way to save money is to be juuuuuust a little bit more unwilling to part with it in the first place.

Posted by: Mark Wiseman, who would probably lend the Dalai Lama his debit card.  (Well, first he would say “how did you get here without at least SOME extra cash?” THEN he would lend him the card) 
       

Reduce college costs by hundreds! (How schools and lenders teach us about overdraft fees)

So junior’s off to college?  Well, here’s list of some things he absolutely cannot do without:

    • Laundry detergent?…..check
    • Boots, raingear and winter coat?…..check
    • Class schedule?…..check
    • Overdraft protection?…..check

Wait…..what? Overdraft protection?

Yep. You read correctly.  Odds are more likely than not that once junior gets to school and opens up his school-sponsored checking account (complete with handy-dandy debit card) he’ll get a quick lesson in banking and overdraft fees.  Of course, if anybody is sending him money on a regular basis, they will learn this lesson as well.  Why? Because (as reported by the Center for Responsible Lending in their latest report: “Overdraft U: Student Bank Accounts Often Loaded with High Overdraft Fees”)   the overwhelming majority of accounts that are made available to incoming students are pre-destined to generate huge fees for the bank. (think: Millions) 

Exclusive and (ahem) lucrative agreements

For a long time, banks have realized that college students are a great way to grow their customer base.  Along with the many freedoms that college brings is the freedom to watch your own finances.  You’re free to spend what you want on books, nights on the town, late-night snacks, beer (we’re not naïve…we’ve been to college).  How banks get these new accountholders is nothing shy of brilliant. They either facilitate the schools’ financial aid packages (“let us disburse the funds and we’ll give each student a free account”) or pay the school directly to be endorsed as the “Official Bank of State U.” 

Either way, the agreements let the banks logo the living daylights out of the campus (many even let them put their logo on the students’ official college IDs!)  The banks realize two things: 1) students are going to make up for the marketing and setup costs by incurring fees on a frequent basis; and 2) once consumers get a checking account, they are extremely likely to stick with that bank for years afterward (even if they’re unhappy with the services that they are getting).

“But, isn’t this a conflict of interest?  How can the schools be on the lookout for predatory practices if the banks are paying them cash?”  Great questions.  An even better question “Is the school putting my child in a bad situation?…..”

“What do you mean a multiple fee-fee?”

Although I’d love to claim that line, it’s from The Drew Carey show. In the show, Drew’s bank calls to tell him that he’s overdrafted on his checking account.  He asks them to transfer money from his savings account to his checking account.  He acknowledges that there’s a fee for the phone call and for agreeing to make the transfer.  Then Drew says “a multiple fee-fee!” [big laugh from the audience]. But, how crazy is it? 

The current college generation doesn’t use checks (or even cash) the way college students of years-past did.  For them, it’s all about the debit card.  Maybe it’s because using plastic makes it less painful than using cash  or maybe it’s because millennials use the plastic alternative to focus more on the benefits of buying something than what it actually costs.  In any case, the result is that this generation overdraws their accounts more than anyone before.

Customers love debit cards…

because they’re easier to carry than cash, they work almost everywhere, they’re useless to thieves and they can be replaced.   The downside is that debit-cards are the easiest way known to man to lose track of how much money you actually have.  (How long would it take you to get into trouble if you started writing checks but NOT writing down where they went and for how much?)  And, if there’s a group of people who are likely to lose track of their disposable funds, it’s college students who start their evenings at around 11:30 p.m.  The next day when they say stuff like “I think that we got pizza last night at some point,” they probably don’t spend a whole lot of time thinking about whether they went to the ATM or how many times they did so.

Banks love debit cards…

because they provide a quick (and legal) way to snatch much of those “disposable funds” from their customers in the form of a fee.

    • Wanna check your balance to make sure you have enough to pay for dinner? Ka-ching!
    • Wanna take money from an ATM that has some other bank’s name on it? Ka-ching! 
    • Make a mistake and swipe your debit card for something that is a dollar-and-a-half more than what you have in your account? Double Ka-ching!

The biggest fee bell-ringer is the overdraft fee.  The usual cost for an overdraft is $35.00. “So, just don’t overdraft. How hard can this be?” you say.  If you’re at an ATM, trying to get cash an overdraw is impossible.  Their computer will tell you (with incredible speed) “we’re sorry, but we are unable to process this transaction.”  But, if you’re buying something, it doesn’t quite work that way.  In a perfect world, the bank doesn’t let you overdraft.  Couldn’t they just have their system tell the vendor to turn you down because you’re out of cash?  They COULD. But, here’s the rub….they don’t want to.

“Hold your chin up….higher”

There’s a Clint Eastwood film where he overpowers a guy who is twice his size and makes him look silly…(OK, maybe that’s every Clint Eastwood movie – other than the one that he did about taking pictures in Montana and feelings).  He has the guy on his knees in some kind of hold and tells him “hold your chin up….higher.”  And when the guy does, Clint knocks him out. 

Not a pretty picture, but this is exactly what the bank is doing to your kid, when they give him a debit card.  (perhaps we can discuss the outrageousness of even having automatic fees in an age when everything the bank does is performed by computers and only takes them three seconds in another blog post)  This post, however, is about THIS type of outrageous fee.

If junior overcharges his debit card by $50.00, the bank will process the transaction and pay the vendor. Then they will charge him an additional $35.00 for using money that he doesn’t have.  Here are some other charges that will incur a $35.00 fee, if junior has insufficient funds in his account. Let’s say he wakes up with an $8.99 balance on his school-issued debit card:

    • He buys a $10.00 T-shirt on game-day, because he wants to look like everyone else on the way to the game……Boom! $35.00;
    • He buys a $7.50 hot dog while at the game, because he forgot to eat-breakfast…..Boom! $35.00;
    • He buys a $3.00 pin on his way out of the game that says “The other team [stinks]” because we just won….Boom! $35.00;
    • He buys a $1.75 hamburger on the way to his apartment because there was free beer at the tailgate party he went to on his way out of the stadium…Boom! $35.00;

Scenario 1: Junior’s card is “denied,” so he has to go to the game in one of the T-shirts you bought him on his last day at home; has to subsist on some of his friend’s nachos and wait til he gets back to his dorm to have dinner.  No money spent.

Senario 2: Junior enjoys a hot-dog and a burger, whilst wearing his new pin-draped T-shirt and lies down to nap after the game with a full tummy and looking smart in the school’s colors (even though there is a mustard stain that he’ll forget to treat, rendering the shirt useless for future wears)  The whole afternoon set him back a whopping $162.25, because the bank that the school set him up with charges a separate overdraft fee, no matter how small the purchase. Unfortunately, he has no idea that he’s overdrawn and will continue buying stuff with money he doesn’t have – until he tries to get cash at the ATM or gets his next bank statement (whichever comes first).

There oughtta be a law

Well there is….sorta.  The Federal Reserve passed a rule in 2009 which required banks to get consent from consumers before they charge them an overdraft fee.  But (as we all know from the mortgage crisis) requiring the consumer to sign a form that warns them of impending nastiness rarely gets them to think twice.  The bank can also get their “consent” while junior is signing the stack of forms written in itty-bitty print when he is opening up the account, which usually guarantees that he will not see the warning, anyway.  

Editor’s note of irony: Still think that if you have the chance to sign a disclosure, you’ll be aware of which consumer rights you are giving up? Everyone reading this has a cell phone.  Can you remember what your cell phone contract said about Forced Mandatory Arbitration or about the fact that you gave up your right to your day in court if you have a fight with your cell service? …..We didn’t think so.

The Consumer Financial Protection Bureau (CFPB) recently proposed a “Safe Student Scorecard,”   which (among other suggestions) asks that schools that have these type of partnership agreements with lenders require the lenders to set up accounts that don’t have overdraft fees.  To be sure: the proposal does NOT suggest that banks let you overdraft without charging you fees.  The suggestion is that the bank figures out a way to turn down the transaction and not let you spend money that you don’t have in the first place.  (one could argue that this is an admirable understanding to have with regards to one’s personal finances).

Editor’s note of even more irony: the next time someone tells you that “all governmental regulations are bad” or how the CFPB was the creation of Satan, ask if they don’t think that preventing overdraft-fee-gotchas against 18 year-olds is something that might not be a tad helpful for all of us?

What now?

If you’re sending junior to college, you might want to set him up with his own account before he gets to campus.  After all, you don’t HAVE to use the bank that the school has an agreement withThe CRL report points out that on-average, the accounts that are set up through these partnership agreements will wind up costing the student more in fees than the non-partner banks that the student finds on his own.  In the most unbelievable examples, students can get charged more in fees by the partnership banks than they will spend on books for the entire school year.  College is a giant learning experience.  Where better to learn about how bank fees can screw up your account balance? 

Posted by: Mark Wiseman (who once had a roommate who was once charged a fee by his bank, because he printed his signature on his check.  We all thought it was hilarious….well, almost all of us)