Gary North

May 30, 2009

Debit cards are safer than credit cards if you tend to be a debt junkie. They limit how much you can spend to what you have in the bank account.

But debit cards can sometimes create a problem: overdraft charges. In 2007, banks collected $19 billion in overdraft fees from all cards. Debit cards were included.

When you sign up for a debit card, you would be wise to sign a form refusing any overdrafts. Better to have the transaction rejected than pay a $30 fee.

If you decide you really need overdraft protection, so that you can complete every transaction, get it the smart way: by debiting your savings account. You will still pay the overdraft fee -- $30 per transaction -- but you will not run up a debt. (http://www.federalreserve.gov/pubs/bounce)

Do not get overdraft protection by setting up a line of credit. That defeats the purpose of the debit card. You may still be charged a hefty $30 fee if you spend more than is in your debit card's account. The bank charges you the fee, and then extends your line of credit. It does so in $100 chunks.

Say that you need $10 extra. The bank draws down your line of credit by $100. Then, unless you fill out a special form, your next addition of cash to your account to pay off the $100 loan in your debit card may not be used to pay down that $100 loan. The bank then charges you 15% or 18% per annum on it. Read the fine print.

If you want evidence about this practice, click here:

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