Surprise! Debit Cards Have Fees

Banking, Checking & Savings Accounts, Fees, Investing & Retiring

Most consumers know that credit cards can come with fees other than interest charges applied to balances. Annual fees, late payment fees, balance transfer fees, cash advance fees, foreign transaction fees … the list goes on.

Did you know that debit cards could have fees as well? If not, don’t feel bad. In a recent survey by Lexington Law, over one-third of Americans (37%) were unaware that debit cards may charge fees.

Debit card fees may include PIN charges (fees for using your PIN in a debit transaction), processing fees for using out-of-network ATMs, international fees for using your debit card outside the U.S., and overdraft fees for a debit transaction without sufficient funds in your account.

The good news: banks must disclose these fees upfront in the terms and conditions of your debit card account. The bad news: most people don’t read the terms and conditions.

Overdraft/insufficient funds fees are the most common fees charged to debit cardholders – making up about three-quarters of all checking account fees at an average cost of $250 per year, according to a 2014 report by the Consumer Financial Protection Bureau (CFPB).

Overdraft fees are often triggered by small debit card purchases (a median $24 according to CFPB data). Some people who incur overdraft fees don’t learn from their mistakes, as only 8% of bank customer’s account for 75% of overdraft fees.

People may not realize that debit card transactions are limited by what’s in the corresponding checking and savings account. Perhaps they forget that debit card transactions are immediate. Maybe they have overdraft protection and don’t realize there are charges involved. Whatever the reason, the Lexington Law survey suggests that consumers don’t understand exactly how debit cards work – and may not be paying attention if they do.

The Lexington Law survey uncovered other misconceptions about debit cards and how they differ from credit cards. Half of Americans believe that debit card transactions affect their credit score. Since you aren’t borrowing money with debit cards – you’re paying with funds from your checking or savings account – there’s no credit involved at all and no effect on your score. You can check your credit score and read your credit report for free within minutes by joining MoneyTips.

Confusion may stem from many card readers offering a “Debit” or “Credit” option when processing your debit card. You aren’t borrowing money in either case. The funds still come from your account. All that choice does is affect how the charge is processed.

Choosing debit routes your payment through an electronic funds network and the withdrawal is quickly reflected in your account balance. Choosing credit routes the payment through the credit card networks, adding another processing step and increasing the time it takes for withdrawal from your account.

There is one exception to the borrowing rule with debit cards. If you authorize overdraft protection, your debit card won’t be rejected if you spend more than you have in the account. The bank is temporarily lending you money to cover the difference (along with possibly charging overdraft fees).

If you do overdraw in that case, you’ve agreed to let your debit card access a line of credit – and this activity can slightly alter your credit score. However, most survey respondents probably didn’t know that when they assumed debit cards affect credit scores – they were likely thinking of typical debit card transactions.

Know the difference between debit and credit cards to avoid financial pitfalls and unwanted fees – for example, the timing of withdrawals and charges, and how they affect your cash flow. Why give a bank or a credit card company any extra money in unnecessary fees?

If you want more credit, check out our list of credit card offers.

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