Consumer Inq

Ever use your debit card for a latte at Starbucks or a burger at McDonalds? Chances are, you're much more likely to do so today than you were even a couple years ago.

Guess what's also more likely: If you screw up and forget you're short of funds, your bank is much more likely to profit, big-time, from your mistake.

A new study by the Center for Responsible Lending says that U.S. banks and credit charged $17.5 billion in overdraft fees last year, up 70 percent from $10.3 billion just two years earlier.

Why the dramatic climb? The center, which made its name targeting predatory mortgage lending, blames bank practices designed to generate more fees under the guise of helping bank customers.

Eric Halperin, who directs the center's Washington office, says that as recently as three years ago, "the vast majority of banks didn't allow you to overdraft on a debit card" or at an ATM. But paying such overdrafts is increasingly common practice — the center says they now account for nearly half of all overdraft fees. Only about 1 in 4 come from the traditional source of overdrafts: writing a check for more money than you have in your account.

If you think something is wrong with this picture, you're not alone. Financial advisers, many of them employed by banks, have long touted debit cards as better for money management than credit cards because you can't spend money you don't have. But now you can — you can essentially "borrow" the $3 for the latte, and pay an average of $34 in overdraft fees for the privilege.

You can even overdraft at the bank machine without being warned. Some banks will allow you turn this feature off, but it's important to know that you could be at risk: Otherwise, if you withdraw $200 when your balance is just $190, the ATM may well fork over all the dough you requested, only to trigger a $30 or $35 overdraft fee for the privilege of getting what you asked.

And that may not be the worst of it. Depending on how your bank prioritizes checks and debit withdrawals as it clears each day's transactions, some consumers complain of being hit with multiple overdraft charges when a single one would have sufficed. Banks have always insisted that they clear the highest-dollar-value check first, because that's typically the most important one to a customer, most likely the rent or mortgage payment. But as Halperin points out, that logic fails in a world where the bank plans to pay every overdraft, and charge you for each one. If that's the plan, why not clear them in an order more favorable to your customer?

Is it a good thing to pay overdrafts? Absolutely — this is one place I agree with bankers' traditional spin. If I write a check to my mortgage company, or for that matter to anyone else, I want my bank to cover it, either as a courtesy or through some established mechanism. I wouldn't have written it unless I believed I had the funds available — which, by the way, is the legal standard for writing a legitimate check versus committing a crime.

That's why I've had overdraft protection nearly all my adult life, though from banks and credit unions that offer more reasonably designed programs. My favorite versions trigger transfers from a separate savings account. But I'm happy with the one I now have from my credit union, which is essentially a small line of credit that charges me for the time value of my money at an agreed-upon interest rate. But even paying a $5 or $10 transfer fee, as some banks charge, beats paying a full-fledged overdraft charge.

Those programs offer a valuable service: insurance, at a reasonable price, if I'm not paying close enough attention to my check register or bank balance. The new-fangled versions, whether they're called "overdraft protection," "bounce protection" or "overdraft loans," seem more aimed at milking the unwitting customer.

In a larger study released in January, Debit Card Danger, the Center for Responsible Lending found that the median cost of an "overdraft loan" triggered by point-of-sale use of a debit card was $2.17 per dollar borrowed.

What's the answer to this problem? The Center for Responsible Lending supports a proposal by U.S. Rep. Carolyn Maloney (D., N.Y.), which she says would lend "fairness and transparency" to the overdraft-loan process. You'd have to consent in writing to accept overdraft loans. You'd see how costly they can be when the flat fee is rendered in traditional "annual percentage rate" terms — for the median point-of-sale loan, a shocking 20,000 percent, the center says. And you'd receive a warning before an overdraft is processed electronically.

That last protection is most important of all, as far as I'm concerned. My bank's computer system knows exactly how much money I have available when I hit the "Withdraw" button or swipe my debit card at Wawa or CVS.

Maybe I want to borrow the extra money and pay the bank's fee. But it should at least have the decency to ask.

Every time I hear a radio ad for a bogus "free credit report," I get angry. If you listen to commercial radio much, you'll know that means I get angry a lot.

I've warned Inquirer readers about this problem before. It became especially galling in September 2005, when Pennsylvanians and many other East Coast residents finally became eligible for a genuinely free annual report from each of the three national credit reporting agencies. But the problem plainly isn't going away – not when there's so much money to made from the unsuspecting, and regulators are too deferential to crack down.

The commercials you hear aren't for a genuinely free credit report, at least as I'd define it. Yes, you won't be billed directly for the report – just for add-ons such as credit-monitoring services that are always part of the deal. In my book, paying $100 to $150 a year doesn't add up to "free." If you disagree, please do speak up.

How big is this problem? Recently, a University of Utah researcher, backed by Consumer Reports WebWatch, decided to take a close look. (Read his study here.)

Robert N. Mayer looked at 24 sites that touted "free" reports – many with the word free conspicuously embedded in their sound-alike Web addresses. Typically, they offered that "free" report in return for monitoring or other pricey add-ons, such as a credit score from each of the three national credit bureaus. (Here's a tip: Generally, one credit score will tell you all you need to know. If your credit is clean, you may not even need that.)

One of Mayer's key findings: While there may seem to be lots of competition in the market, with so many different sites, there's much less than meets the eye. Instead, Mayer found the market largely dominated by two of the three national credit reporting agencies – the same folks that are required by law to provide consumers with a genuinely free annual report. He said either TransUnion or Experian owned or was closely associated with 17 of the 24 sites.

This won't surprise anyone who's gone to one of the credit bureaus' own sites to find a genuinely free report. The general rule is: They don't make it easy.

On the TransUnion site, for instance, there are several come-ons luring you to pay for a package deal that includes your "free" credit report, and one modest link that refers vaguely to the "FACT ACT and other free credit report disclosures." (The FACT Act is the 2003 law that mandates the genuinely free annual reports.)

Follow that TransUnion link, to be sure, and you'll learn about your rights, including the right to get a free report more than annually if you fit other criteria, such as believing you're the victim of fraud. But if you just want your genuinely free report, it's less confusing to go directly to the "central source" the bureaus were required to establish by the 2003 law.

You can request your free reports from the central source in three different ways:

1) On the Internet, at www.annualcreditreport.com

2) By phone, at 1-877-322-8228

3) By letter, mailing your request to:

Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281

By any method, you'll have to provide sensitive, personal information, of course. If you want to do it by mail, you can get a printable form by clicking here. Otherwise, be sure to include your full name, including your middle initial and generational designations such as "Jr.," as well as your current mailing address, your Social Security number, and your date of birth.

Remember, too, to specify whether you want all three reports or something less. You're entitled to a free report every 12 months from each of the three agencies: Experian, TransUnion and Equifax. If you have any special reason for concern, such as plans to apply soon for a mortgage or real worries about identity theft, you'll want all three. If not, you might want to space out your requests.

Isn't it funny how the Web address for the genuinely free credit report doesn't include the word free at all? It's enough to make me angry even with the radio off.

(For instructions for invoking a security freeze, a cheaper and more-reliable alternative to credit monitoring, click here.)

More fuel for the fire over the growing use of credit scoring to price auto insurance: The Federal Trade Commission said today that, as a result, African Americans and Hispanics will pay more for coverage.

The FTC report (read it here) also supports an insurance industry claim: that credit scores are accurate predictors of the claims consumers will file. But in a release accompanying the report, it put an official imprimatur on a common allegation by consumer advocates: that African Americans and Hispanics tend to have lower credit scores, and will suffer financially if scores are used to set insurance premiums.

Advocates were quick to respond.

“It’s not fair that consumers with spotless driving records can be penalized with higher premiums just because of their credit score,” Norma Garcia, a senior staff attorney at Consumers Union, said in an e-mailed statement. “Insurance premiums should be based on the risk of an accident, not a consumer’s bill paying record for other goods and services.

If you're shopping around for a new credit card, you might be tempted to think all cards are created equal — equally good or equally bad, depending on your perspective. After all, they all allow you to pay with plastic, charge interest if you carry a balance, and hit you with penalties if you mess up on payments. Card to card, what could be different?

Plenty, according to the latest survey of 36,300 Consumer Reports readers, who collectively hold nearly 62,000 cards and answered questions about problems related to interest rates, billing, and customer service.

The complete results are available online here, though a subscription is required to view details — including the ratings.

The best of the bunch? Topping the list, as it often does, was USAA, available to members of the military, retirees and their families. Scoring almost as well (cardholders were "very satisfied") were cards issued by a group of credit unions, two retailers (Cabela's and Nordstrom), American Express and Discover.

Results were much less inspiring for cards issued by some of the nation's leading credit-card banks.

Consumer Reports put it this way: "The nation's five largest MasterCard and Visa issuers — JPMorgan Chase, Bank of America, Citibank, Capital One, and HSBC, which control almost 80 percent of the Visa and MasterCard market — all had undistinguished scores. More of our readers who used those banks' cards complained that they were assessed unfair late fees or experienced unexpected interest-rate increases than did readers who held cards from the top-rated issuers. And none of them was exceptional at resolving problems."

Overall, the five worst scorers were JP Morgan Chase, MBNA, Capital One, Direct Merchants, and, at the bottom, Providian.

Credit-card trickery remains a problem, despite pressure from advocates and lawmakers. On that subject, Consumer Reports quotes a GAO study and a report from a California advocacy group, Consumer Action:

A September 2006 Government Accountability Office study also noted new hidden fees, such as charges for making payments over the phone, which can range from $5 to $15, even when the payments are on time.

But Consumer Action's survey, issued in May, noted that many cards still employed universal default. "And if you carefully read the change-in-terms section of most disclosure statements, most say that the issuers can change the terms of the cardholder's agreement at any time for any reason, language that amounts to the same thing as universal default," says Ruth Susswein, deputy director of national priorities for Consumer Action. "There is no other contract in the world that can change its terms at any time."

Consume Reports said its survey "found evidence of the damage that universal default can inflict on cardholders. Fully 28 percent of our readers who were paying the highest interest rates (more than 25 percent) reported that their rate had increased due to a universal-default clause."

The bottom line: Pick a card carefully. Read the terms. Then watch your bills like a hawk. If you use the card for convenience, paying charges on time and in full, you're probably OK with most cards. But if you ever carry a balance, you're at risk of paying an extra, unexpected price.

If that happens, all you can do is complain to the issuer (which sometimes will get charges reversed "as a courtesy"), complain to bank regulators, or find a new card. You'd do better to choose a card carefully in the first place.