$5 overdraft ends up costing $350

Joseph Rizk, 20, figures it was one trip to Taco Bell that sent his checking account over the edge.

When he was a senior at Wayne State University, Rizk pulled out his Chase debit card to get some fast food. He spent about $5 more than he had in his checking account. He didn't spot the trouble early enough and ultimately got hit with about $350 in banking fees.


"I overdrew, and they pretty much pummeled me with charges," said Rizk, who graduated this summer with a bachelor's degree in biological sciences.

This is one story that's smart to share with anyone who is heading off to college. The debit card -- no matter how cute all those commercials might be -- isn't necessarily your best friend.


And at a time when many parents are struggling to cover higher tuition bills, the last thing a college student needs to do is trigger hundreds of dollars in senseless overdraft fees, too. The fees add up quickly at $25 to $35 a pop.

Overdraft charges are costing people about $17.5 billion a year, according to estimates by the Center for Responsible Lending, a consumer group that analyzed data on overdrafts. Banks have made it easier for consumers to overdraw their accounts and rack up big fees.

Young consumers who prefer paying with plastic, instead of paper, are vulnerable.

About 45 percent of overdrafts are attributed to using a debit card or taking out cash from the ATM, according to the center.

Pulling out a debit card to buy fast food has turned into a financial tripwire.

"In the past, you couldn't overdraft at McDonald's. Now you can," said Eric Halperin, director of the Center for Responsible Lending's Washington office.

Three years ago, Halperin noted, most banks routinely denied debit-card purchases at the checkout lane if you did not have enough money in your checking account.

"The fact that you can overdraft with a debit card is relatively new," said Halperin, who favors legislation that would require banks to, among other things, disclose the annual interest rate on what consumer groups call overdraft loans to consumers. (Banks call the charges overdraft fees.)


During the past few years, banks and credit unions began allowing more debit-card purchases to go through at checkouts as a convenience to consumers, even if there is not enough money in the checking account.

Most customers are routinely enrolled in so-called bounce-protection programs that, according to consumer groups, are not explained well and turn out to be expensive.

In many cases, consumers would pay less in fees if they went to the bank and set up a system to link the checking account to a savings account, a line of credit or a credit card to cover an overdraft.

For young consumers, the rules can be particularly tricky.

Some think they're in the clear because they've just checked their balances with tellers or online.

But that account balance often does not reflect how much money there is available to spend.


"We don't have real-time transactions. There will always be outstanding transactions that the consumer has authorized but have not hit the bank," said Nessa Feddis, senior federal counsel for the American Bankers Association in Washington.

Rizk was upset that a teller never warned him the money he was depositing would go toward covering overdraft fees.

So after he deposited one check, he thought he had more money to spend. He kept spending, triggering more fees. That's how a $5 purchase started a chain of fees.

He begged for mercy at the bank, got some, but still ended up paying $150 in fees.

Now he buys fast food with cash.

While many consumers would never dream of writing checks for $2 or $3, the debit card makes it easy, and many young people see it as a convenience.


It's easy to forget that the debit card is really just a plastic version of a check.

"You've got to keep track of what you're spending, just as you did in the old days when you wrote checks," said Mary Kay Bean, a spokeswoman for Chase in Detroit.

And if you wait until you see the next statement, it's too late.

"The debit card is really where it's a serious problem," argues Ed Mierzwinski, the consumer program director of the U.S. Public Interest Research Group in Washington. "It's harder to keep track of your balance because of the tricks banks use."

Say you write a $100 check to cover books -- and then put $5 on the debit card for coffee, $15 on the debit card for dry cleaning and then write a check for $60 to cover a phone bill.

That's $180 in transactions and checks. Say you had $158 in the checking account. You're $22 short.


Would you face one bounced-check fee of $34?

Probably not. The bank most likely would clear the $100 check first. And then, the bank would attempt to clear the $60 check. Whoops, you don't have enough to cover that check.

So then you're looking at three overdrafts -- the $60 check, the $5 debit card and the $15 debit card.

At $35 a pop, that's $105 in fees.

At some banks, there are extra fees if an account continues to be overdrawn for five or more business days.

"Everybody advertises free checking, but it's only free at the front end," Mierzwinski said.


Many consumers, of course, do not pay any fees for checking accounts.

About 65 percent of consumers spend $3 or less in monthly fees for bank services, such as checking accounts and ATMs, according to a survey of 1,000 consumers. The American Bankers Association released the survey recently.

Consumers who don't get hit with the fees typically balance their checkbooks, use direct deposit, don't make mistakes, keep plenty of money in savings and checking and avoid using debit cards for every whim.

Yet consumer groups argue that overdraft fees often hit those who can least afford them. A small group of consumers typically pays most of the overdraft fees.

Diane Page, 41, of Sterling Heights, Mich., said her son Joshua, 17, was charged eight fees of $25 each in one day. It added up to $200 in fees for being overdrawn $130.

He was $330 in the hole.


"This is a 17-year-old kid," she said.

The money was in the bank at the time and spent on different days with a debit card from Co- merica Bank.

The trouble began when Joshua withdrew cash before he left for Army basic training at Fort Jackson, S.C., in July.

His mother acknowledges that he did not keep track of purchases. He based future spending on a balance the teller gave him. But that balance didn't include outstanding items. He didn't leave enough money in the account to cover purchases that had not cleared and were posted later.

So he got socked with one $25 fee for $1.79 at 7-Eleven.

One $25 fee for $4.12 at Little Caesars.


One $25 fee for $4.76 at Burger King.

One $25 fee for $6.24 at White Castle.

One $25 fee for $6.76 at Burger King.

One $25 fee for $7.62 at White Castle.

One $25 fee for $14.77 at 7-Eleven.

The eighth $25 fee would have been for the cash he withdrew at the bank.


After his mother spotted trouble, she got involved and the bank agreed to waive some fees. But instead of $200, Joshua is still being charged $100 in fees.

"It's just not right," she said.

Susan Tompor writes for the Detroit Free Press.