Watch out for debit card fees!
Overdraft charges can come as a surprise -- a costly one

The math is alarming for anyone with a debit card. At Bank of America, overdrawing your account by as little as $6 could trigger a $35 penalty. If you don't realize you have a negative balance and continue spending, you could incur that fee as many as 10 times in a single day, for a total of $350.

Failing to repay the overdraft within a few days now results in an additional $35 penalty.

When the damage is done, you've racked up fees approaching $400 in less than a week, for overdrawing your account by as little as $60.

It's a worst-case scenario, but not entirely far-fetched.

For some consumers it will come as a shock because they're under the impression that if they're using their debit card, it will be denied if there isn't enough money in their checking account to cover the purchase. So notes Catherine Williams, Vice President of Financial Literacy for Consumer Credit Counseling Services of Greater Chicago.

That was the case just a few years ago. Then most banks rejected debit card transactions if there wasn't enough money in the account, said Jean Fox, director of financial services at the Consumer Federation of America.

Now automatic enrollment in overdraft programs, which allow consumers to draw more than what's in their accounts, is an industry standard. The Federal Deposit Insurance Corp. says a 2006 survey found three-quarters of large banks have automated overdraft programs.

The practice, which has drawn criticism from consumer advocates, has been accompanied by rising overdraft fees. The Center for Economic and Entrepreneurial Literacy notes the average overdraft fee has jumped 10 percent to $27.50 this year from $25 last year, citing data from Moebs Services.

According to a survey by CFA conducted in March, initial overdraft fees at banks range from $16 to $36. The median top fee charged is $35 per transaction.

"The fees can be applied even before consumers know their account is overdrawn," Fox said.

It's important for consumers to understand the fine print of their debit cards, said Williams, who noted a bounced check for $18.42 could lead to an overdraft advance of $25.

"So all of a sudden instead of just covering my check, they've made me a loan," which has to be paid along with the overdraft fee, she said. "It is a very expensive service."

Overdraft programs on debit cards often are compared to the much-criticized over-the-limit programs for credit cards, which charge consumers for spending beyond their credit limit. Come February, the recently signed credit card law will require banks to give cardholders the choice to opt into such programs. But the law doesn't address debit cards, however, and banks can still automatically enroll cardholders into overdraft programs.

For consumer groups, what's particularly troubling about overdraft fees is that debit cards are fast becoming the plastic of choice among U.S. households.

"The linchpin of avoiding these fees is making sure that you have a very close handle on what you actually have in the account," said Christine Benz, director of personal finance at Chicago-based Morningstar Inc.

"A lot of financial institutions would sell this [overdraft protection] as a service or a 'benefit.' If it's a 'benefit' you don't need or one that you think will get you into trouble or cost you in the long run, opt out of it or look for a card that doesn't include that 'benefit.'"