Monday, June 16, 2008

Myth: If I use my debit card, I can't overdraw my account

Many people are under the mistaken belief that if they use their debit card for a purchase, they can’t overdraw their account. More and more people, however, are finding out the hard way that this isn’t really the case. So how can this happen? Prior to 2003, most banks would not accept a debit card purchase or ATM transaction if there were insufficient funds. Since then many banks have begun allowing the overdrafts without alerting customers and then charging a fee averaging more than $30. According to the Center for Responsible Lending, a consumer advocacy group, consumers are paying $17.5 billion in overdraft fees annually, of which nearly half is the result of a debit card transaction or ATM withdrawal. One way the overdraft can occur is because the merchant has placed on a hold on the funds in your account. Typically, this will be at a gas station, restaurant, auto rental or other places where the exact amount of the purchase is not known at the time the card is swiped. Although practices vary, gas stations, for instance, may place a $75 hold on the card since they don’t know if you’re filling the gas can for the lawn mower or the tank on your motor home. It may take as long as 72 hours for them to release the hold. In the meantime, you made additional transactions expecting that your full balance was still available to you. Because of the hold, or possibly several holds, a portion of your funds was not available causing an overdraft and the accompanying fees. These holds can be avoided by using a PIN (personal identification number) transaction as opposed to a signature transaction. Both are still a debit transaction even though you may have been asked when presenting your debit card whether you want “debit” or “credit”. The “debit” or PIN transaction will be processed immediately whereas for a “credit” or signature transaction, a hold will be placed on the account. A second issue is that not all transactions are reported immediately. Some merchants batch process the day’s transactions rather than each individual transaction. If this is the case, when you checked your balance after the purchase, it did not reflect the actual amount of funds available.

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