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CARD Act Review: Debit Card Rules

The Credit CARD Act, passed last year, will take full effect later this month (August 22), so there’s no better time to review the changes you can expect to see when that deadline arrives. Here’s what to look out for from your debit card and bank.

The New Normal: No Overdraft Coverage

Thanks to provisions in the CARD Act, banks must now offer overdraft protection (also known as abusive overdraft loans) to consumers on an opt-in basis, meaning that you won’t get this “service” unless you specifically sign up for it. Specifically:

• Old way = Over-limit purchases go through, cost money. Before the new restrictions, most banks charged overdraft fees automatically for transactions that exceeded a customer’s limit. A customer could easily rack up hundreds of dollars in fees in a single day without realizing it, because every over-limit purchase would trigger a separate fee.
• New way = Customers choose what protection they want. Now, you can decide whether or not you want banks to “cover” you on over-limit purchases and hit you with a fee for that “service.” For many customers, it makes more sense to have a transaction declined and avoid the fee.

But, as this Consumerist.com article points out, some banks are pushing hard for consumers to sign up for overdraft protection—and it’s no wonder, since banks make billions of dollars in fees from such “services.”

So how can you avoid paying fees for a service you may not want? Try these tips, which can help you keep track of your money (and avoid costly overdraft loans).

• Carry some cash: Some analysts suggest paying cash for any purchase under $10. That way, even if you opt in to overdraft protection, you won’t get dinged with a hefty fee for a tiny purchase.
• Pay with your credit card: If you’re not the cash-toting type, choose credit instead of debit. But treat your credit card like a debit card—pay the balance in full each month, or you’ll end up paying so much in interest any overdraft savings might be canceled out.
• Know the loopholes: The overdraft protection opt-in does not apply to all transactions—checks and recurring debit card deductions (like automatic bill payments) may still be subject to overdraft fees, depending on your bank’s policy. If you aren’t sure what that policy is, call your bank’s customer service department to find out.
• Keep track of your account: Whether you use a checkbook registry or log on to view your account information online daily, perhaps the best way to make sure you don’t go over your limits is to keep tabs on your money so you don’t forget about purchases and spend money you don’t actually have.

For a more detailed look at the new debit card rules, check out the Federal Reserve’s summary.

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Choosing Your Card Wisely to Protect Yourself from Fraud

Odysseas Papadimitriou is founder and chief executive officer of Evolution Finance, which is the parent company for Wallet Blog and Card Hub—an online marketplace for credit card offers.

‘Credit or Debit?’ You’re used to hearing this question when checking out at the grocery store, but have you ever stopped to think about what your choice means in terms of your financial security?

Using a credit or debit card makes you vulnerable to fraud, but 62 percent of purchases in 2009 made using electronic payment methods* suggests that this fact is not stopping consumers from using their cards. Cash may be safer in terms of fraud, but it is simply not a practical option for our day-to-day needs. So this begs the question, ‘credit or debit?’ when it comes to fraud protection.

Fortunately, the major credit and debit card networks (i.e. VISA and MasterCard) adhere to a strict 0 percent liability policy for victims of fraud. That means that whatever money is stolen from you via your debit or credit card will be returned to you in full. That does not mean, however, that you will have the same experience getting your money back with both your debit and credit card.

Your debit card, as we all know, is tied to your checking account. This is your actual money – the money you use to pay for groceries, gas, utilities, and major expenses like your mortgage payment. If someone wipes out your checking account, you have a serious cash flow problem. You won’t have access to the money you need to make these important purchases or payments until your debit card issuer is able to sort out the fraud claim. While you’ll get your money back eventually, that doesn’t mean you’ll get it before you bounce your rent check or need to do your weekly grocery shopping.

Your credit card, on the other hand, isn’t tied to real money at all. If someone maxes out your credit card, you’re not out anything that you’ve earned. Simply dispute the charge and your credit will be restored. In most cases, you won’t even become responsible for the debt for one to two months after the fraudulent charges have been made. This is more than enough time for your credit card company to sort out the fraud claim before the debt becomes your responsibility.

Because of these factors, it is my recommendation that you use a credit card for day-to-day purchases. Not only are you risking less in terms of fraud, but if you have a rewards credit card you also have the opportunity to earn extra cash or airline miles on your purchases. Your debit card is simply withdrawing your money and giving you nothing in return.

I also recommend signing up for ACH to have your credit card payments automatically withdrawn from your checking account every month. This way you won’t have to worry about paying your credit card bill on time and your bill will be paid in full.

Of course, a credit card is not a good option for a person who is not capable of managing their credit responsibly. For everyone else, though, a credit card can offer less hassle and more peace of mind when it comes to protecting your money.

* Source: CSCU, The Nilson Report, VISA

The views and opinions expressed in this post are those of the author only, and do not reflect the views and opinions of Total Bankruptcy. If you are struggling with credit card debt, you can explore your bankruptcy options with a local attorney.

Posted in Credit Cards, Credit and Bankruptcy, Fraud, credit vs debit, debit cards | Comments Off

Federal Reserve Sets Limits for Debit Card Fees

Debit card users will have to opt-in to overdraft fees for ATM withdrawals and one-time purchases, according to a new set of ruled unveiled by the Federal Reserve Board.

The measures, which will take effect July 1, 2010, are part of a series of decision issued by the nation's central bank to limit abusive practices by banks announced over the past year.

Authorizing Fees

Under the new rules, all debit card holders must be given notice of the bank's policies, including those on overdraft fees, in plain language. Cardholders can sign up to be charged fees or not, and banks cannot change the terms of service afterward.

Banks will still be allowed to charge overdraft fees for recurring debt card purchases, such as recurring utility bills that are automatically charged, as well as on bounced checks.

The measure is mainly aimed at one-time debit card purchases or ATM withdrawals that can often result in fees greater than the purchase amount.

Protecting Consumers

"The final overdraft rules represent an important step forward in consumer protection," said Federal Reserve Chairman Ben S. Bernanke in a press release. "Both new and existing account holders will be able to make informed decisions about whether to sign up for an overdraft service."

Declining Transactions?

Of course, those who overdraw their bank accounts won't be given free money by their banks.

Overdraft protection allows banking customers to make payments even when their funds are limited, and are charged a fee for the convenience.

Those who opt-out of overdraft protection may instead see their transactions declined if they attempt debit card purchases when their accounts are low. However, any overdraft transactions approved by the bank cannot result in fees.

Posted in Bankruptcy and Predatory Lending, Federal Reserve, Financial Literacy, bank fees, debit cards | Comments Off