Starting this August, if you try to use your debit card to make a purchase without having the funds in your linked checking account, that purchase will be declined. Right in the store. Or the restaurant. No longer will your bank be able to approve the transaction and then hit you with a $35 overdraft fee -- unless you decide that you want to be able to charge without having the funds, and opt in – signing on some dotted line to signal that you want this protection.
Now you have to understand that for the banks, these $35 fees add up to $20 billion in annual revenue. That's why The New York Times reported last week, that your bank is going to try to convince you to join this new party. It will try to raise your level of fear, using words like "protection," and "emergency," and sending letters like the one from Chase quoted in the Times story, which read:
"Your debit card may not work the same way anymore, even if you just made a deposit. Unless we hear from you. If you don't contact us, your everyday debit card transactions that overdraw your account will not be authorized after August 15, 2010 -- even in an emergency."
I, for one, will not be opting in. And I don't believe you should either. Fees like this (which, despite improvements in credit card legislation can still top the amount of your purchase) are outrageous. With the widespread (and typically free) availability of online banking, you ought to be able to keep close enough tabs on the money in your account that you don't overdraw. In most scenarios.
The scenario that makes things difficult is preauthorization. When you check into a hotel with a debit card, for instance, the merchant runs your card for more money than your room rate to account for things you might tack on later like movie rentals or the mini bar. Sometimes, explains Anne Pace, spokeswoman for Bank of America, hotels put through the not-yet-spent money as a hold – which would not cause you to overdraw as long as you had enough to cover the room itself – but other times they put it through as an actual transaction and credit you for the difference when your final bill is tallied.
Now let's say you only have enough in your account to cover the room, nothing more. What happens?
"We don't know it's precautionary," Pace says. "So we either decline – if you don't have enough and you don't have overdraft protection -- or you overdraw if you do have protection and you'll get hit with an overdraft fee." The same happens with rental cars.
To me, that raises one important question. How much of your money do hotels and rental car chains typically tie up? For the Enterprise brands at airports, which include Alamo, Enterprise and National, the answer is a flat $250.
"Our home city locations have a similar policy, but customers should call the local branch to verify deposit amounts," says Lisa Martini, a spokesperson for the company. Avis says at its locations that accept debit cards – not all do – there may be a minimum hold of $500, more if the rental total exceeds that. Hertz requires that renters using debit cards have enough funds for the rental charge, plus up to $200 in incidentals.
As for hotel chains, InterContinental Hotels Group, which includes brands like Holiday Inn, and Choice Hotels, the parent company of Comfort Inn, Clarion and Quality Inn, declined my requests for comment. But Mel Wilinsky, who serves on the Finance Committee of the American Hotel and Lodging Association, says that when a guest uses a credit or debit card, hotels reach out to the bank for authorization of an amount, which varies widely by hotel. "If there are funds in the account, the bank will set aside the amount of our request and the transaction ends. If there are not sufficient funds in the account, the transaction will be rejected by the bank, and we will not receive authorization for the transaction."
So what's the answer? If you're one of those people who always keeps a few thousand more in checking than you know you need, you're fine. If not, routine balance checking now has to be your way of life. Pace says B of A is looking into mobile phone alerts that can tell customers when they're down to their last $10.
"We don't want you to walk into Starbucks and be declined. And so we're trying to push people to those tools," she said.
But there is one other way to know you won't face those nasty overdraft fees – or being declined at the register. Chances are it's a solution that has worked for you sometime in the past. It's small. It's light. And when used correctly, it won't cost you any more than a few bucks a month.
It's called a credit card.
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