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Katz: Debt-it cards

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By Braden Katz

Monday, March 1, 2010

Last month, the debit receipt for my lunch at the Underground was identical to all the others in the stack next to the cash register. Although my purchase appeared to be normal, I had unknowingly participated in a complicated small loan for my lunch that day.

My checking account had been completely empty. Later, I found out that I had unintentionally agreed to a six-dollar loan with the equivalent of more than 7,000 percent interest for a sandwich. The bill informed me that my five dollar lunch actually cost more than 40 dollars with the included $35 overdraft fee.

This experience taught me that even at the lowest level of everyday transactions, the dysfunctional nature of the market is apparent.

Less than 20 years ago, if there was no money in a person’s checking account, they may have left the Underground hungry but certainly not in debt. I had fallen victim to one of the many deceptive practices of major banks’ card industry.

With the absolute control over the credit and debit business, banks have found hundreds of ways to trick consumers into outrageous fees and interests rates.

As a result, millions of Americans are finding themselves helplessly sinking under debt that began with one missed payment or overdraft.

Although the Senate recently passed a bill to stop some deceptive credit card practices, debit card issues have remained untouched as legislators struggled with Republican opposition as well as the powerful bank lobby.

A debit card that draws money directly from a checking account seems like a simple concept. However, banks have set up an extremely profitable system designed for consumers to make mistakes.

Directly after a costumer uses a debit card, the purchase goes through a computer system that charges the most expensive purchases first. This drains the checking account more quickly and allows banks to charge an overdraft fee for each individual small purchase.

Meanwhile, consumers are rarely warned that their checking accounts are empty as they rack up hundreds of dollars in overdraft fees.

With this in mind, its logical for banks to create a system designed to lure people with small sums of money in their checking accounts because they are more apt to make mistakes.

Not surprisingly, the largest portion of credit and debit card profits comes from what the industry calls the “unbanked market.” This refers to the 40 million poorest Americans who would have earlier been denied to access to credit and debit cards. These people serve as a vulnerable target-market that has created billions of dollars in profits for the banking industry.

Today, a person opening an eviction notice can simultaneously receive an already approved debit card in the mail. However, not only are insolvent individuals approved for both debit and credit cards, it is also completely free to sign the contracts.

With 34 billion U.S. debit transactions in 2008, more and more consumers are turning to their debit cards after enduring billions in debt from credit card’s hidden fees and interest rates. Yet, regardless of consumer’s efforts to conduct safer purchases, major banks continue to successfully scrounge among the growing group of financially vulnerable Americans for profits.

— Katz is a junior from Overland Park in creative writing and political science.

Comments

Katz: Debt-it cards

I don't understand this. Isn't the point of a debit card not to spend money you do not have? Most adults who use debit card's daily also keep track of their balance daily so they do not run into these problems. Blaming banks for your inability to keep track of the amount of purchases you have made is irresponsible. It is a pretty easy rule of thumb- don't spend more money than you have. You could simply ask your bank to remove your overdraw protection and the problem would be as good as fixed. Then you would have left the underground hungry but "certainly not in debt." You can also borrow from your bank or a different bank against your overdraw protection (typically $700 in credit) if you are in a really tight spot someday. Maybe this isn't the case with all banks.

Katz: Debt-it cards

So you're blaming the bank and the "dysfunctional nature of the market" because:

  1. You overdrew your bank account. To avoid this in the future, balance your checkbook! It's very easy to carry around a small piece of paper with your balance written on it.

  2. You didn't read the contract your bank gave you about overdrafting. It's all there! When you spend money you don't have, you pay interest. It IS one of the ways that banks make a small profit.

  3. Some people get themselves into debt by doing the exact same irresponsible things that you did.

I agree that the market has a dysfunctional nature at times, but this is only when the two parties involved in a transaction are uninformed on the details of their transaction. It is your ignorance that caused this problem, not a systemic problem with capitalism. Learn your bank policy next time.

Katz: Debt-it cards

The actual problem is that banks do not process transactions in the order in which they were made. They process the smallest ones first so you are likely to overdraft if you don't pay very close attention to your account. These types of unfair practices mean it is not always the person's fault. The banks are, in fact, out to get you because they make billions of dollars doing so.

The easiest solution is to use cash. If you can't buy it with the money you have on you, there's no problem.

Also, why anyone would have less than $6 in a checking account is beyond my comprehension. Unless you're living from paycheck to paycheck, it makes no sense. Furthermore, anyone who is that poor should not be wasting all their money on food from the underground.

Katz: Debt-it cards

Even if the banks don't process the transactions in order, they still can't charge you money that you didn't spend. If the author would simply write down his transactions he could know how much money he actually possesses at any given time!

Katz: Debt-it cards

Unfortunately, you're wrong. The fact that banks do not process the transactions in order means you don't know how much money you actually have in your account. Bank accounts are NOT updated in real time, so even if you check online you don't know when the funds have really left your account. If you keep it on a piece of paper, it's still wrong because it does not accurately reflect how your funds are being removed. Sometimes it'll take days for transactions to be processed and have the funds removed from your account. If you have $100 and buy $30 of tshirts, $10 meal, $50 groceries, the usual order is that the $10, then $30, then $50 gets charged, even though that's not at all the order in which you made the purchases. If you use online banking, this is a huge issue.

Obviously it's easy to say 'omg don't spend money if you don't have it.' The point is that banks are out to scam people, and they make billions doing it. It's stupid to allow banks to slap people with overdraft fees. Debit cards should work like an instant withdrawl, but they do not, and that's usually why people run into trouble. Banks are making debit cards work like credit cards, and this is the real problem. This article is obviously a poor example because no one should only have $6 in a bank account, unless they're a little kid or something.

The best thing to do is use cash or use a credit card in a responsible way. I get 2% cash back on everything I buy and I avoid all the problems that come with credit cards by having the balance paid automatically every month. American Express credit cards offer extended warranties on things you buy, and other credit cards have great bonuses that you can take advantage of if you just aren't an idiot about it. People should be responsible, but corporations shouldn't be allowed to scam people.

Katz: Debt-it cards

Personally I feel sorry for the ignorant out there that believe the banks are to blame for this. It is not the bank's job to check on everyone's account to make sure that they don't overdraw their account. It's the account holder's job to know and understand the rights and responsibilities of having an account.
First: It's IN the contract that you signed when you opened the account. Banks are legally required to have a fee schedule and hand it out to new account holders. The number one fee on that list is the overdraw fee. If you spend money you do not have, you are correct, it is a loan. Just like personal, auto, and home loans charge interest so do these. It's not fair that you get to spend money you don't have and think that you can get away with it. Second: it's not the banks job to check on your account, which is why they don't offer checking accounts to those are not old enough to handle the responsibility. Most checking accounts require a person under the age of 18 to have a parent or guardian on the account with them. This is because we at banks know that someone under the age of 18, and clearly some above, are not going to understand the ins and outs of an account. Having an account is a RIGHT, it is not required, therefore it requires responsibility. It is YOUR job to know how much money you have in the account and you job to know when you are in trouble. Third: Although it is only a DEBIT card it will still overdraw one's account unless they are trying to get it out of an ATM. If you are at a store it is known as a Point of Sale Purchase and that company has no way of knowing how much money the account has so it will accept the charges. Banks also offer what's called Overdraft Protection which allows you to overdraw your account up to a certain amount and they will pay it. It's usually around 400-700 dollars. AFTER that amount has been reached the charges will start being rejected.
Fourth: Like said before this is not a deceptive process--we put it there in plain sight and you agree to it when you sign the papers for the account. Overdraft charges are the number one way that banks earn money, but it is not because we are trying to gouge people out of their money, it is because in essence you are borrowing that money from us. We cant just hand out money to anyone who wishes, these things come with consequences.

I am sorry that you have fallen into that "it's not my fault and someone is to be blamed" mindset that so many Americans hold, but truly one should not bash the banks like this when they really have no understanding of how they work. I work at a bank and am a personal banker and it is my DUTY to inform everyone of the charges and their rights and responsibilities of having account and I am sorry that no one took the time to explain that to you. You should really get all of the facts straight before chastising the banking system in a way that makes you just look ignorant.

Katz: Debt-it cards

Except it should be the bank's job to process the transactions in the order in which they occurred, and not process the smallest ones first in order to hit people with overdraft fees when they've been following their online account information. This is a well known practice and a simple google search will show it's true. Debit cards should have overdraft protection automatically off and make people enroll on their own if they want it. Nowhere else do you see extra services automatically on. If I buy a computer, I don't automatically get enrolled into the 3 year extra warranty plan unless I call a company to turn the extra warranty protection off. This is an extra feature that should be off by default, but for some reason (i.e. greed) this feature is turned on by default. Thanks for letting us know that this is how banks make their money. This is exactly why we need banking reform.

Katz: Debt-it cards

Rather than following your online account information like that, you should try balancing a physical copy of your checkbook. Carry a little piece of paper around with your account balance on it and do simple arithmetic every time you perform a transaction. It will eliminate the problem you're talking about because you will always know how much you have left!

This is how people have balanced their checkbooks for the last ...however long checks have existed. Before online transactions even existed, there were checkbooks. Try it!

Ta-da!

Katz: Debt-it cards

Or the banks could do their job and properly update accounts online. I get paid via direct deposit. I have no idea when those funds actually enter my account, because the way the banks process these things does NOT correspond to what they tell you online. Using a piece of paper doesn't actually tell me anything. Same goes if you deposit a check. You have no idea when those funds are actually available. This is why people have problems. The piece of paper method does not reflect the actual status of your account.

If you deposit a check or get funds deposited into your account, the bank might wait to process that until after they process charges you made AFTER depositing funds. This is common. Money goes in, your account says you have X dollars, you make a purchase, and then overdraft because the bank did not tell you how much money you really had in your account.

Again, this isn't an issue for me because I keep plenty of money in my checking account. This is an issue for a lot of people (use google to see) and it needs to be addressed by regulatory legislation. Using a piece of paper does not solve the actual problem.

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