Research, regulation, industry reports

Debit cards pushing older adults into overdraft trouble

Connie Prater

There’s word from two different sources that many older Americans may be struggling under the weight of credit and debit card obligations.

The Durham, N.C.,-based Center for Responsible Lending released a study today detailing how debit card use is the No. 1 trigger of overdraft fees for older adults (defined as 55 and older). The typical fee for going even a penny over on a purchase or ATM withdrawal is about $34.

“Account holders who overdraft using a debit card pay back far more in fees than they receive in credit,” according to the report, which says Americans who rely on fixed income Social Security benefits pay an estimated $1 billion in overdraft fees.

According to the report, banks and credit unions may provide expensive overdraft protection plans for debit card accounts but users are rarely given the opportunity to opt-out of such programs. Similarly, users aren’t typically told of or given the option to link their debit cards to another checking or savings account so that overdraft amounts can be deducted from those accounts instead.

Overdraft protection
The Federal Reserve Board, National Credit Union Administration and Office of Thrift Supervision have proposed overdraft protection rules requiring lending institutions to allow consumers to opt out of overdraft fees. Issuers could charge the fees only if an account holder fails to opt out.

The study contends those measure don’t go far enough to protect older Americans. They suggest requiring banks and credit unions to allow account holders to “opt in” to overdraft programs. The study also wants lenders to warn consumers when ATM withdrawals or online or store purchases will result in overdrafts. Limiting the number of overdraft loans that can be made to customers each year is another recommendation.

The American Bankers Association, the national banking trade group, issued a statement in response to the Center for Responsible Lending survey. The ABA cites a 2007 poll of 1,000 people 55 and over that said that 91 percent of seniors had not paid overdraft fees in the previous year. The ABA offered tips on how to avoid being hit with overdraft charges: keep track of your balance and remember automatic payments from the account and link the debit card to a checking account. If your bank doesn’t offer opt-out options, find a bank that will, the ABA says.

Bankruptcy picks up pace
The rate of bankruptcy filings among people 65 and older more than doubled between 1991 and 2007, according to a new study released Tuesday by the AARP’s Public Policy Institute and Harvard University law professor Elizabeth Warren.

Overall, the number of people filing for protection from creditors because of mounting debt rose 38 percent between 2006 and 2007. Researchers note that the 2005 bankruptcy law amendments led to a short-term decline in bankruptcy filings and the current trend toward rising rates among older Americans is troubling.

The study found that Americans 55 and older have had the sharpest increase in bankruptcy filings — from 8.2 percent of bankruptcies in 1991 to 22.3 percent in 2007. By contrast, people 34 and young logged the greatest decrease in filings. That group represented nearly half of all bankruptcy filers in 1991 but only about a quarter (26.1 percent) in 2007.

‘Normalized debt’
“Our culture has normalized debt,” Warren says in a press release. “Now individuals nearing or in retirement are realizing how difficult it can be to manage that debt as they age.”

Adds AARP’s Susan Reinhard about the study: “It indicates that financial security is progressively eroding for many older Americans. We are exploring why this is happening and what can be done to prevent it.”

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