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Seven Ways to Avoid the Debit Card Blues

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Being aware of your balance and knowing how overdrafts work are key.

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Debit cards provide a quick and easy way to pay for inexpensive items such as Frappucino's or deodorant, but they should carry a warning: be careful or this card can cost you a fortune in fees.

According to The New York Times, US-based banks earned $27 billion from consumers -- that's not a typo and we don't mean million -- for debit and other card overdraft fees in 2008. One consumer paid $102 in fees for three incidental debit card purchases because his account was overdrawn, turning his $4 café latte into a beverage costlier than many champagnes. But what can consumers do to reduce paying hefty overdraft fees?

Bank strategies are driving up fees, practices which are condoned by regulators, explains Kathleen Day, a spokesperson for the Center for Responsible Lending, a non-partisan research center. Regulators deem these overdrafts fees, not small loans, so charges don't come under the Truth and Lending Act. Banks can charge whatever fees the market will bear. In reality, consumers are taking out a small loan and fees should be constrained and regulated just as in any lending arrangement, Day says.

Most consumers fail to recognize that they can opt out of overdraft agreements, says Robert Manning, author of Credit Card Nation. Many people don't even know they'll be subjected to overdraft charges so the minute a fee is triggered, go to your bank and opt out. Unlike credit cards, debit card overdraft agreements are fluid and can be terminated at any point.

"The biggest mistake consumers make, particularly younger people, is going to an ATM machine, getting cash, and forgetting to deduct fees. That's often how they get into trouble," Manning says.

Moreover, banks like Bank of America (BAC), Citibank (C), and Chase (JPM) are reordering your debts each day to boost fees. Consumers with $50 in their checking account that make three purchases, two in the morning for $20 and then a third in the afternoon for $100, are charged $34 for each purchase because the bank puts the $100 purchase first. Hence the $100 fee plunges the consumer into overdraft, tripling the bank's fees.

In one 12-month period, 50 million Americans overdrew their checking account, and 27 million account-holders faced five or more overdraft fees, according to the Center for Responsible Lending. At $34 a pop, that's $170 that flew out of a consumer's checking or savings account and into the bank's coffers.

Here are tips on how to avoid excessive overdraft fees:

1. Keep better track of your account balances. If a consumer wants to use a debit card, make sure to maintain a strong enough cushion in your savings or checking account (whatever the debit card is tied into) to avoid facing fees. Day notes however, "It's hard to be responsible when you're assaulted with tricks that are impossible to figure out."

2. If your account is getting low, pay in cash to reduce the reflex action of paying for your latte with a debit card.

3. Ask your bank to send an alert the minute your account has gone into overdraft, notifying you to the situation so you won't use your debit card and can pay in cash to avoid excessive fees.

4. Overdraft fees should be proportionate to the charges. Having banks charge $34 for a $10 purchase is excessive, but a 10% penalty (which would be a $1) of a $10 purchase might be more reasonable.

5. The Center for Responsible Lending noted that 46% of all overdraft fees are triggered by debit cards at ATM's or point of sale and could be prevented with a warning or denial. Most sales average half the $34 fees, so consumers are paying $2 for every dollar charged.

6. If you're hit with an overdraft fee for a debit card, go directly to your bank and opt out. That's the fastest way to reduce fees before they escalate, Manning says.

7. When a consumer enrolls for a debit card, ask the bank representative exactly how overdraft works, what the fees are, what your responsibilities are, and find out how you can keep extra fees to a minimum. Sometimes banks reduce fees to customers who bundle or use multiple products.

Editor's Note: For more coverage on out of control bank fees and rates, see Unregulated Credit Card Rates Are Breaking Consumers Down and Can My Credit Card Company Do That?
No positions in stocks mentioned.
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