Overdraft Protection For Debit Cards
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Lot of people have been getting notifications from their bank or credit union about overdraft protection for debit cards. These notifications sound urgent and tell you that unless you respond that your financial institution will have to turn off overdraft protection on your debit card soon. While it sounds like your bank is trying to take care of you, the opposite is likely true.
Debit Card Overdraft Protection
You may be aware that recent banking reform legislation shut down some of the worst abuses that banks and credit unions used to generate big fee income at the expense of their customers. One of those banking abuses was so-called overdraft protection, which in reality is just a way to charge you big fee.
When you write a check, that check gets sent to your bank. Your bank pays the amount on the check out of funds in your checking account. Overdraft protection turns on when you don’t have enough money in your checking account for the check to clear. Most people assume that if there is not enough money in their account to pay a check they wrote that the check bounces, but not if there is overdraft protection.
The way overdraft protection works is that instead of returning the check you wrote for insufficient funds, your bank pays the check, and gives you a negative checking account balance. If this were free, or even reasonably priced, then you would say thank you and be grateful that your bank takes such good care of you. Unfortunately, this is not the case.
Instead, your bank charges you a fee for using the overdraft protection "service". That fee is often just as high as the fee charged for bouncing a check. The bank gets to collect a big fat fee. The only thing the customer gets out of it is that you don’t have to deal with the merchant you wrote the check to and pay any bounced check fees from them. Reasonable people can disagree on whether or not that is a service worthy of the fee charged for it.
When it comes to debit cards, however, overdraft protection is almost always a scam.
Normally, when you try and use your debit card to pay for something and you do not have enough money in your linked checking account, the transaction is declined. The cashier hands you back the card, and most people use a different card instead. Then, you would know that there is an issue that you need to check into right away. While potentially embarrassing, this situation is free, and there is no financial harm to you.
When your debit card has overdraft protection, then your bank MAY approve the transaction even if you don’t have enough money in your checking account. Of course, for using the overdraft protection service they charge you a $35 overdraft protection fee, and you never have any idea that there was a problem. In fact, you might go on to use your card four or five more times that day, and each time you will be charged another $35 fee. You could rack up over $100 in fees easily thanks to your bank’s "service."
Imagine that you don’t realize that your paycheck didn’t direct deposit on the day you thought it would. You use your debit card to buy lunch for $10, pay for some books $15, and then rent a few movies at Redbox $3. You spent $28 for day, except you actually ended up spending $118 for the day because you are nailed for three overdraft protection fees of $30 each.
In a world where most people have more than one way to pay, it is slimy and underhanded for banks to pretend that they are doing you a favor by charging you $30, $40, or even $50 to approve a transaction on your debit card. What is worse, is that nobody ever explains this to you, AND, they enroll you in this money draining "service" automatically when you sign up. Sure, it is "disclosed" to you, in the 30 pages of fine print you get with your account.
You can see why Congress tried to ban this behavior. Powerful banking lobbyists succeeded in getting the rule watered down, but now you have to "opt-in" to overdraft protection on your debit card. That is why all of those notices have started showing up.
Unless you have no other credit cards or debit cards and never carry cash, DO NOT opt-in to overdraft protection on your debit card. Just use another means of payment if your card is ever declined. You’ll save lots of money.
On the heals of recent negative job numbers reported by the U.S. Department of Labor, comes news that bankruptcy filings increased by 14 percent during the first half of 2010. Does this bode well for the economy or is this one of the signals of a recession coming back to haunt us?
Unfortunately, as is always the case when it comes to finance and the economy, the answer is complicated. The most important thing to notice is that the first half of 2010 includes January through March of 2010 which are the months of this year that came before the stock market started recovering. Those months also came before the some lending started loosening back up. They also came before job numbers started going up suggesting that more people will not need to file for bankruptcy if they can make their loan payments with the salary from their new job.
However, it would be foolish to dismiss the news of increasing bankruptcy filings as a non-event. It is just as important to note that the 14 percent increase in filings being reported is as compared to the first half of 2009 when bankruptcy filings were not exactly at all time lows. In fact, the first half of 2009 was very bad for bankruptcy filings already. To actually increase over that number, things in the economy had to be really bad.
What does high bankruptcy filings mean for the economy overall, and does this signal a stock market downturn or a coming recession or even depression?
Bankruptcies Get Worse Economic Outlook for 2010 Gets Clearer
The bad news, of course, is that if people are filing for bankruptcy that means that financial institutions will suffer losses due to those bankruptcies. Furthermore, plenty of the bankruptcies from “irresponsible” borrowers who were clearly overextended in order to buy real estate – remember how “fix and flip” was the easy way to get rich just a few years ago – and those who just overspent and never had any real chance of paying back their loans without selling their house to get the equity, already filed for bankruptcy months ago. That means that these bankruptcies are the “hard” ones, the bankruptcies that come from people who have lost their jobs being out of work for so long that they had choice and no other way to make it work.
Now, for the good news.
Americans in general have far too much debt and far too little savings. This so-called savings deficit is a big problem. Furthermore, for many Americans who have been jobless for too long, there is almost no way they could get out of the hole they are in even if they got a new job paying what they used to make tomorrow. Finally, the U.S. real estate market has bottomed out or is only declining slowly in all but the most overheated real estate bubble markets.
Doesn’t sound like good news does it?
Here is where the good news for the economy is.
As has been widely reported, banks and financial institutions took government stimulus dollars and bailout money to shore up their own balance sheets and did very little additional lending. That means that a majority of debts being wiped out by bankrupt borrowers are old loans instead of new ones. That means that a lot of these debts have already been written off or assigned very low values on the bank’s balance sheets. In other words, this isn’t going to make things any worse for them than it already was.
With that being the case, at least for the short term, there is little concern for the banking sector as bankruptcies rise, so long as they come to an end soon. This is where the good news comes from.
As bankruptcy filings accelerate, they clear out the pipeline of possible bankruptcy filers that might otherwise come later. Banks will find that the profits they managed to squeeze out earlier this year are gone, however, when they come back, there will be much less potential danger overhanging them.
On the other side of each bankruptcy filing is a person or family that no longer has to pay off debts that had grown so unmanageable that they could have choked off 100% of discretionary spending from that family for years. In the aggregate, this would be much worse news for the economy than high bankruptcy numbers now. While bankruptcy is a huge blow it is a one time event from which recovery, albeit a slow one, begins immediately.
Many bankruptcy filers are baby boomers approaching retirement. These people have gotten the very pleasant surprise that, in most cases, retirement accounts such as IRA accounts and 401k accounts cannot be touched in bankruptcy. These same borrowers will also find out that as long as they make their mortgage payments, they are also very unlikely to lose their home during bankruptcy, because a certain percentage of equity is considered untouchable by creditors, as well. Having borrowed against this equity earlier, and with home values dropping, many filers will find themselves well under the equity limit.
Add it all up, and you have a large collection of people who will actually find themselves in a pretty decent position as the economy turns around. Those without jobs will find employment again, and those with them will find their paychecks much easier to stretch to make ends meet without all of those credit card payments. In other words, it will take a lot less economic improvement to put these households back to “normal.”
In short, higher bankruptcies and accelerating filings will cause pain in the short-term, but may be just what the doctor ordered for the economy for next year and beyond.
Recent new that payrolls fell in June here in the U.S. is bad news for the economy, but maybe not as bad as it is being made out by the headlines.
Let’s start with what the numbers are and move on to what they mean.
As with all economic statistics, employment numbers are compiled from numerous sources which provide an inconsistent snapshot of job activity from around the country. These numbers are made usable by applying a consistent mathematical methodology to them. This results in numbers that may or may not be in any way accurate. What makes the statistics relevant and useful is that because they are always calculated in the same manner looking at the numbers relative to previous statistics is a valid way to analyze growth or contraction in employment.
….More about personal finance tips.
Total Nonfarm Payroll US Department of Labor
The “employment number” everyone is talking about today is specifically the total nonfarm payroll numbers and is based upon a combination of data gathered from surveying people (the household survey data) and surveying businesses (the establishment survey data). Much like the Nielsen ratings for television, the numbers gleaned from the surveys are then extrapolated to represent the entire country.
What Job Losses Mean For The Economy
The June 2010 total nonfarm payroll declined by 125,000 for June. This is the “bad” news that headlines are shouting from the rooftops. The same report also says that the unemployment rate actually dropped from 9.7 percent to 9.5 percent. This is the “good” news that no one feels like playing up today.
Keep in mind that since today is July 2, that this data is in no way “final” and that the “revised” June payroll numbers will come out later.
So, what do the job losses in June mean for the economic outlook for the second half of 2010? What do they mean for the stock market recovery underway since 2009?
As always, viewing a single number without context is not meaningful. The June payroll numbers are the first to show overall job losses in 2010. That means that either:
- a) The U.S. economy is slowing back down
- b) The U.S. economy is moving sideways
- c) The U.S. economy continues to grow, but at a slow pace
Temporary employees working on the US Census 2010 were finished with their work in June. These employees alone counted for a drop of 225,000 jobs. More importantly, the private-sector actually added 83,00 jobs. This is in no way robust growth, but it is still positive. However, this low-level of growth also means inflation will not increase and the Fed can keep interest rates low.
The economic outlook for the rest of 2010 depends then on two factors. First, is how these numbers hold up when the revised numbers come out later. If the private-sector number remains positive, then that is good news overall. If, however, that number gets revised down and becomes negative, then we have a problem.
The second factor is the July employment numbers. If July also comes in negative, then one cannot help but consider that whatever growth the economy managed to squeeze out on the job front during 2010 is over for now, or at least on pause. If job growth stalls out now, there is nothing to kick it back into gear until the holiday shopping season with a few hundred thousand temporary jobs come back online.
It is standard lobbying practice for any industry about to come under additional regulation from Congress to shout to the press, and whoever else will listen, that any and all proposed regulations or laws of any kind would adversely affect the poor customer. Thus, any additional rules or regulations of any kind on credit card companies would make things worse for credit card customers.
More reading: Citibank Thankyou Points catalog.
Grandstanding aside, while poorly thought out regulations can hamper entire industries and harm customers, many times new government oversight can have a positive affect both on the industry as a whole, and on the experience of customers as well. In the case of recent credit card legislation, the new rules and regulations on banks and credit card issuers were thoroughly debated not just between Republicans and Democrats, but within those parties as well.
Fortunately, the by-product of real debate is often good legislation. Unfortunately, the power of lobbyists can overwhelm good debate when the sides are fractured.
What emerged from Congress in the form of newer, tougher, credit card industry regulation was indeed thoroughly debated, but was it good for customers, or did it, as the industry claimed, hurt ordinary credit card holders?
The general answer to that question remains open. Clouding the issue is the overall tightness of the credit markets, compounded by the nearly overnight end to the traditional way of doing business in the banking and finance industry. If it is harder to get a credit card there is no way of knowing whether that is the result of over-reaching rules issued by Congress, or if it is just that so many financial institutions have shaky balance sheets cluttered with “toxic assets.”
One area that keeps being mentioned in the press that has negatively affected consumers is that credit card reward programs are becoming more stingy. However, little evidence is cited other than the occasional card holder who says that they are getting less value from their credit card mileage or credit card points than they used to. The catch is that many credit card rewards programs were being trimmed before the credit card laws were even passed!
I made note in this personal finance blog that Capital One NoHassle Rewards were less valuable than they were just one year before back in 2008 when I used 10,000 Capital One miles for each $100 gift certificate to major retailers. Nobody can blame credit card laws for that!
Let me know if you see a downward revision in your credit card rewards program. If you have an old rewards catalog, don’t throw it out. Instead, keep it to compare how your rewards change over time, and if a credit card company is screwing you, don’t be afraid to open a new reward credit card or even a cash back credit card and throw that old in the shredder.
Recently, we talked about how Warren Buffet’s Congressional testimony about Moody’s responsibility for causing the banking crisis and stock market crash by rating collateral mortgage options (CMO) triple-A up until it was already obvious to everyone that these investments were in trouble, was wrong headed. Today, the ratings agencies Fitch and Moody’s gave us all another reason to wonder why we listen to rating agencies at all with its downgrade of British Petroleum.
It is not that downgrading BP is incorrect. It is both the timing and the sanctimonious nature of how the downgrades British Petroleum (BP plc – NYSE:BP) stock and debt came about.
It has been six weeks since the April 20th explosion on the Deepwater Horizon oil rig and the company’s stock has already fallen over 40% since the incident. Which has been a big hit on Members of Congress are calling for BP to put $20 billion into some sort of escrow fund out of concerns that the company may end up not being able to fully pay its legal obligations resulting from the massive gulf oil spill. Yet, both Moody’s and Fitch’s statements act like their concerns about BP are actually news to anyone.
“Today’s downgrade of BP’s long-term debt ratings reflects Moody’s expectatoin that the protracted oil spill … will result in significant containment and clean-up costs as well as litigation costs.”
Really? Gee Mr. Wizard, thanks for letting all us dumb Main Street investors know that we should be concerned about how much the cleanup of the biggest ever oil spill is going to cost British Petroleum, because otherwise we would have naively assumed that there would be no impact on the earnings of BP nor its ability to repay debt.
In other words, what are the ratings agencies good for again?
While I completely understand that downgrading a company’s credit rating is a very big deal and should not be taken lightly, it seems that the rating agencies are a day late and a dollar short, as my father would say. What value is there in investors waiting for the opinions of the major rating agencies?
To put it another way, if your credit rating score from FICO took this long to update, Fair Issacs would be out of business within the year, and yet, the business equivalent moves so slow that if they handled consumer credit you would be able to open a dozen new rewards credit cards before your score got lowered from 750 to 600 after you defaulted on your home equity loan.
Today’s downgrade simply gives financial writers one more thing to talk about and provides the “proof” necessary for newspapers and magazines to start talking about how the oil spill has hurt BP financially. Otherwise, there just isn’t any value in being told what investors already know.
