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Credit Card Applications » News » Other » Debit Overdraft Fees Slammed

Debit Overdraft Fees Slammed

September 04, 2009
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Consumer advocacy groups as well as critics are calling for tougher regulation of an industry practice what they claim is unfair and misleading. Known in the credit industry as a "overdraft protection program" the practice is prevalent among card companies who issue debit cards. In the past, debit cardholders with empty bank accounts were usually able to enjoy their cards and use them for purchases. In recent years, however, banks and card issuers have resorted to charging unregulated fees whenever cardholders charge purchases to debit cards with empty accounts.

Industry experts say that the increasing demand for debit cards has prompted card companies to use them to boost revenues. In fact, Moebs Services, a research body, reported that card issuers and similar financial institutions will earn an estimate $38 billion from overdraft fees this year alone. Researchers add that the poorest 10 percent of the banks' clients will pay for 90 percent of the $38 billion amount.

Vocal critics of the industry practice say that federal regulators have so far failed to act on complaints. At present, government agencies are starting to consider implementing measures to regulate the credit industry's policies regarding overdrawn limits. Consumer advocates, however, point out that if government regulators do not act on the issue immediately, Congress should step in and take the lead.

Another study, this one conducted by the Center for Responsible Lending, revealed similar findings to Moebs Services' research results. The research institute explained in detail what it calls as the "overdraft domino effect." Researchers tracked the credit history of one college students and discovered surprising results. For instance, the student made seven minor purchases totaling $16.55. By the end of the research period, the cardholder owed more than $245 in overdraft fees.

Card companies and banks often argue that the present system allows debit cardholders to continue using debit cards. Numerous studies conducted by research bodies, however, show that overdraft fees presented an annual interest rate average of 3,500 percent in 2008.

Analysts say that federal regulators can implement several measures to ensure that consumers will be protected from abusive overdraft fees and similar systems. For instance, they recommend requiring banks and card companies to avoid enrolling clients in overdraft fees programs and instead make them optional.

Card issues must also inform cardholders about overdrawing their accounts beforehand to give them ample warning. Consumers should also be told what fees will be charged to their accounts if they exceed their limits.

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