Debit-card charges bring costly lesson

University of Minnesota senior Toussaint Morrison's $80 candy bar comes wrapped with a lesson. About two weeks ago, he swiped his debit card for a sugar fix while on the road with his band. By the time he realized it, he'd been charged roughly $80 in fees.

"It's my bad," he acknowledged. But he wished he better understood when his bank posts deposits to his account and why different ATM machines seem to give him different account balances.

Pulling out a debit card to pay for such minor purchases helps 18- to 24-year-olds rack up $1 billion in pricey overdraft fees each year, according to a new report from the Center for Responsible Lending.

The average debit transaction amount that causes an overdraft for that age group is $12, according to the report. The median fee charged young people is $33.

For every $1 a customer is in the red, the bank makes more than $3 in fees. Debit-card transactions are the main culprit.

This report follows on the heels of a July report by the same group that found overdrafts cost consumers of all ages $17.5 billion in fees for $15.8 billion in loans. (The group considers allowing overdrafts to clear to be high-cost loans.) This represents almost 40 percent of bank and credit union income generated by fees, up from 27 percent in 2004.

Consumer advocates say banks are relying more on these fees for profit and they don't want to change. Banks, on the other hand, feel what needs to change is the way consumers are handling their money.

The study comes as Congress is cracking down on the issue. The House Financial Services Committee today is expected to mark up a bill introduced by Rep. Carolyn Maloney, D-N.Y., that addresses overdraft issues. Included in the bill are provisions that would require banks to give customers a breakdown of the fees associated with various forms of overdraft protection -- from the expensive overdraft loan to overdraft protection through a linked savings account to flat-out refusing the protection altogether.

It would also prohibit institutions from manipulating the way debits and checks post to a consumer's account so they can charge more fees.

Banks say they order withdrawals from largest to smallest to ensure that a consumer's most important bills, such as rent or the car loan, are paid before that iTunes download or fast-food meal.

The bill "is a needed first step," said Rep. Keith Ellison, D-Minn., who sits on the committee. "However, I would like to see more information and protection given to consumers to avoid future abuses."

Convenience at a price

At the start of each semester, Cathy Solheim, an associate professor in the department of family social science at the University of Minnesota, asks students in her personal finance course to share frustrating banking experiences. Racking up fees is a common one. She acknowledges that banking policies can be confusing, but says the widespread problem is mainly one of poor financial habits. Most students don't write down their transactions in a check register like they used to, she said, relying on an accounting of their balance online instead.

Solheim also thinks students today are more resigned to fees. "It's starting to feel like they think that's the cost of doing business," she said. "They are also used to carrying more debt so they don't feel as bad about finance charges."

With careful accounting, Joe Witt, president and CEO of the Minnesota Bankers Association, says "overdrafts are completely avoidable." He thinks new advances in electronic banking should make avoiding hefty fees even easier.

Consumers whose balances dip into negative territory aren't the majority. In a survey this summer conducted for the American Bankers Association, 80 percent of respondents said they haven't paid an overdraft fee in the past year.

For Dwayne Emmel, a financial counselor with the Village Financial Service Center with locations in Minnesota and North Dakota, the issue boils down to disclosure and education. "It's important for students to realize the bank's policies," he said. That said, much like credit-card disclosures, most customers won't read them and banks should do their best to make the information accessible.

Convenient but expensive?

The report also expressed concern that the at least 100 university-bank partnerships across the country may not always be in the best interest of students. Some of these banks charge the highest overdraft fees. TCF Bank and the University of Minnesota's arrangement, which University Chief Financial Officer Richard Pfutzenreuter said nets the college roughly $1 million in scholarship money per year, was not included in the study.

Solheim said these university-bank partnerships are attractive to students because they're so easy. Not only do they avoid having to comparison shop for their bank, their student ID acts as a debit card and free ATMs abound. But she thinks there's a downside to such arrangements.

Students "really don't make a consumer decision because they assume the university is going to be looking out for their best interests, and that's not always the case," she said. The report advises students to choose a bank that will link their checking account to a savings account or lower interest line of credit to draw from in case they overspend.

Said Emmel: "Select a bank that will work with you ... not a bank that's closest to campus."

Kara McGuire • 612-673-7293

Kara McGuire • kara@startribune.com