Watch Your Debit Card Balance

Debit cards may seem attractive to consumers who want to avoid racking up credit charges, because they appear to have the safeguard of drawing from your checking account. But it is possible to overdraw from your debit card, and the resulting fees are very high. Here's how to avoid such charges.

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ALEX COHEN, host:

One of the big advantages of using a debit card instead of a credit card is that you won't rack up a big credit card debt, because you're never allowed to spend more than you actually have in your checking account. Or at least that's what most consumers think. But as many have discovered too late, you can actually overdraw on your debit card.

Joining me now to explain is DAY TO DAY's personal finance contributor Michelle Singletary. Hi, Michelle.

MICHELLE SINGLETARY: Hi.

COHEN: So Michelle, your card limit is supposed to be the same amount that's in your checking account. So how can you bounce a debit card transaction?

SINGLETARY: Well, apparently very easily. Essentially what the banks do is advance you a loan. You make a transaction, and if you don't have enough, they go ahead and process that. And as a result, you incur an overdraft fee.

COHEN: What's the typical overdraft fee?

SINGLETARY: Well, typically it cost about $34 when you go over whatever you have in your account, and it doesn't matter how much that overdraft is. So let's say you make a purchase for $7 and you don't have that in your account; you can be charged $34 on that $7.

COHEN: And let me guess, the bank probably doesn't tell you that this is going to happen before it happens, right?

SINGLETARY: That's right. They do not warn you. When you're at that terminal and you're punching in and you think you have enough and it goes in and approves, there's no sort of feedback that says, whoa, whoa, wait a minute, you don't have enough in your account.

COHEN: Are the banks making out on these fees? I mean, $34, that's not chump change.

SINGLETARY: It is not. The Center for Responsible Lending did a survey recently and showed that in terms of debit card transactions and ATM fees that are overdraft, the banks are collecting $7.8 billion - that's with a B - in overdraft fees. And that's about 45 percent of the 17.5 billion they get for other overdraft fees. So debit card transactions and ATM transactions in which people overdraft their accounts, banks are collecting a lot of money on this.

COHEN: Let's say this for the sake of argument here that you're one of those people who doesn't always have a clear mental image of the exact total in their bank account; is there someway that you can order your bank not to let you overdraft?

SINGLETARY: Absolutely. Typically now when people sign up for a checking account, they automatically sign up for this overdraft protection, whether they know it or not. Well, what you need to do is write a letter and say, I don't want that protection. I don't want you to charge me. I want you to decline the transaction if I don't have enough in my account.

You can also get other types of overdraft protection that is cheaper. For example, you can link your checking to your savings account. Of course, you need to have a cushion in there so that if anytime there's a transaction that comes through and you don't have enough in your checking, they automatically pull it out of your savings. That's what my husband and I do. Or you can attach it to a line of credit. And even though that can be costly, it's not as much as incurring overdraft fees.

COHEN: That's DAY TO DAY personal finance contributor Michelle Singletary. Thanks so much, Michelle.

SINGLETARY: You're welcome.

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