Banking institutions and credit unions have long promoted debit cards as a convenient alternative to credit cards. However, consumers are finding out that debit cards are not really as friendly as banks want people to believe. Peter Means, for example, used his debit card as a fallback. He thought it will help him spend his money more prudently.

Turns out that using debit cards did him more harm than good. The bank charged him seven separate $34 fees to cover his purchases when there was not enough money in his account. So even if Mr. Means did comparison shopping and selected the best deals, he still ends up on the losing end. In essence, he paid $6.75 at Lowe’s to get screws and was charged a $34 overdraft fee for it… he paid $4.14 for coffee at Starbucks and was charged another $34 and so on. In total, he spent $238 in overdraft charges for just one day’s worth of transactions.

The $34 fee stated above is marketed as an overdraft protection. But the fees it generates have become a significant source of income for banks especially at a time when consumers are using their credit cards less and are generally cutting back on spending. For this year alone, financial institutions are projected to derive as much as $27 billion because of overdraft fees on checking accounts (usually on checks and debit card purchases that exceed the balance).

It is a fact that banks are now making more money covering overdraft than they do from credit card penalty fees. The reason can be traced to several sources. For one, Americans use debit cards more often. And secondly, some banks manipulate a client’s transactions in a way that will let them incur more overdraft charges. The cascade of fees, as can be seen in the $34 example, can be very quick especially among consumers who can least afford it.

With the financial overhaul surrounding credit cards, banks have found a new way to generate their lost revenue. Debit has become a stealth type of credit. Three quarters of the country’s largest banks with the exception of ING Direct and Citigroup automatically cover ATM and debit overdraft.

• Credit Card Legislation – Companies No Longer Allowed to Offer Perks
• New Credit Card Laws – New Details
• More Irresistible Credit Card Perks – But You Actually Pay for Them
• Tricky Credit Card Fees
• Credit Card Act – Weekly Round-Up
• Credit Card Act of 2009 – The Effects
• Credit Card Rewards – What you Should Know
• Credit Card Debt – The Worst Things You Can Do
• Credit Card Traps – How to Avoid Them
• Credit Card Rate Changes – What Can I Do?