Last week I was in Washington DC, and it seemed like every time I turned on the radio I heard an advertisement calling for action to lower the “swipe” fees merchants pay when they accept debit and credit cards. Retailers’ efforts to curb these fees appear to be working, as the Senate overwhelmingly passed an amendment to the financial reform legislation aimed at helping reduce the “interchange” fees small businesses pay on debit card sales.

Introduced by Assistant Senate Majority Leader Dick Durbin (D-IL), this legislation would direct the Fed to issue rules to ensure that debit interchange fees are reasonable and proportional to the processing costs incurred. Visa and MasterCard currently charge debit interchange fees of around 1-2% of the transaction amount. Proponents of this amendment say that while processing fees have decreased, interchange fees have increased. The ads I heard called these fees a hidden tax on retail purchases.

Whether or not consumers will see prices come down if interchange fees come down is is debatable. A press release issued by Durbin’s office states that an estimated $48 billion in swipe fees were charged by credit and debit card networks in 2008 and that 80% of this money went to ten large banks.

Minimum Purchase Requirements

However, the provision that most interests me is the one that would allow merchants to impose a minimum purchase amount for card purchases. Currently, merchants are supposed to accept your debit card for purchase of any amount. (Those signs posted in stores claiming a $10 minimum purchase required for debit or credit cards are technically violating those merchant agreements with their banks.) The press release on Senator Durbin’s web site says the minimum would apply to credit card purchases, however when I read the legislation, it appeared to me that it applies to both credit and debit card purchases.

About 20 years ago, when I was working for a consumer group in Washington, we first alerted consumers to the fact that minimum purchase requirements are not allowed under Visa and MasterCard’s rules. We were absolutely flooded with consumer requests for more information. It seems they really wanted to be able to use their cards whenever and wherever they could.

Since that time, a lot of us (myself included) have gotten away from carrying cash. Instead, we whip out or debit or credit card for all kinds of purchases – even small ones. What would be the possible effect of allowing merchants to set minimum purchase amounts for debit or credit card transactions?

- Consumers may find themselves spending more on a purchase to meet the minimum if they don't have enough cash on hand.

- ATM fees may see a boost as consumers scramble to pull out cash to cover small purchases.

However, if merchants were free to set minimum purchase requirements then perhaps the industry would come up with more competitive pricing to make accepting cards for small purchases more attractive to retailers. What do you think? Are you accustomed to using your credit or debit cards for small purchases? Do you think the rules should be changed? Are you a small business owner who would like to be able to impose minimum purchase requirements? Share your comments below.

Gerri Detweiler – Personal finance author and Credit Advisor for Credit.com, Gerri contributes budgeting, debt recovery and savings information online. She is also the co-author of Reduce Debt, Reduce Stress: Real Life Solutions for Solving Your Credit Crisis.

New rules for overdraft fees on debit cards may lead to more purchases being declined at the register, but when it comes to consumer protections, it gives consumers the option to avoid paying exorbitant overdraft fees that many banks typically charge.

As recently as 2004, most banks simply would not allow consumers to overdraw their accounts. If you tried to use your debit card to buy something that cost more than your checking account's balance, too bad. The purchase was denied, and that was that. But as we've learned, the alternative may be worse.

What changed? Banks realized how much money they could make by allowing consumers to withdraw more money than they had in their accounts, charging them big fees every time they did it. According to the Center for Responsible Lending, last year, the average overdraft fee was $34, while the average transaction that placed consumers over the limit was just $17. (That often works out to an equivalent interest rate of 200% or more since most borrowers make up the shortfall within a few days). If you overdraw two or three times before you realize it, a new fee applies each time.

More notice, more choice

Last year, America's banks made $20 billion on overdrawn debit card purchases and ATM withdrawals alone (not including overdrawn checks and other fees). It's a staggering amount, especially when one considers that 2009 was the worst year for the economy since the Great Depression, a year when millions of Americans lost their homes to foreclosure and their jobs to the recession.

Finally, the Federal Reserve is changing the rules regarding overdraft fees. Unfortunately, banks will still be allowed to charge them, and the rules do not set a ceiling for the maximum overdraft fee banks can charge. But the Fed's new rules may help consumers avoid fees by giving them more notice and more choice.

Many banks (and some credit unions) automatically enroll customers opening new checking accounts in standard overdraft protection programs which carry hefty fees for each transaction that exceeds the available funds in the account. In most cases, customers were not clearly warned about these fees, nor were they given the chance to opt out.

The new rules change that. A bank cannot charge overdraft fees on debit card and ATM transactions until they first inform customers about the overdraft protection program and the customer agrees to participate and pay the fees.

What happens if you don't opt in for overdraft protection? Just like the good old days: Nothing. The bank will simply deny any debit card purchase that overdraws your account. It may be embarrassing, but at least it will stop you from taking out a 200-plus percent loan. If you decide later that you want overdraft protection, you can opt-in at any time. If you get overdraft protection, and then no longer want it, you can opt-out at any time. Banks are not allowed to charge a fee for opting out.

The opt-in rule applies to new accounts as of July 1, 2010. They apply to existing accounts as of Aug. 1.

There are some important exceptions to the new rules. Many people pay monthly bills like their rent, mortgage or utilities using automatic withdrawals from their checking accounts. Banks do not have to ask your permission before charging you overdraft fees for these types of withdrawals, and they can charge as much as they want. Some banks may let consumers out of over-draft protection on these transactions, but consumers have to ask first.

Checks are the other big exception to the rules. If you write a check for more money than you have in your account, banks can charge whatever fees they like.

However…

Banking industry advocates say the rule goes too far.

"I would suspect that many community banks will simply stop offering overdraft protection to avoid the costs and penalties of complying with the rule," Camden R. Fine, president of the Independent Community Bankers of America, told the New York Times.

It's about time they did stop, say consumer advocates, who don't like the loopholes for checks and automatic withdrawals.

"Some of the time, protection is never as good as round-the-clock protection," Ed Mierzwinski, director of the consumer program for the United States Public Interest Research Group, told the Times.

    

Tips:

• Think before you act. Many banks are already trying to convince consumers to sign up for overdraft protection. These programs can be important for some consumers who may be living paycheck to paycheck and use their debit cards to buy necessary items, like important prescriptions, that they cannot live without. But for most consumers, overdraft protection is often unnecessary. If you can live without this protection, don't pay the fee.

• Ask questions. Always ask to see your bank's policy for overdraft and other fees in writing. If you notice new fees on your monthly statement that are not mentioned in your account agreement, contact your bank immediately.

• Watch for holds. Rental car companies, hotels, and even gas stations may place a hold on your debit card for the anticipated amount of the bill. Depending on how much money you have, this can freeze your entire account. The hold typically is not removed until several hours or a couple of days after the final transaction is processed.  Consider using a credit card for these types of transactions instead.

• Watch for fraud. Many accounts are overdrawn because an identity thief uses a stolen debit card to make a purchase or an ATM withdrawal. Sign up with your bank to monitor your account online; find out whether you can setup text or email alerts if your balance falls below a certain amount; and pay close attention to your monthly statements. The sooner you spot fraud, the easier it will be to stop it, and the fewer fees you may have to pay.

One of the most common complaints I hear is from debit card users who have bounced a check because a hotel or rental car company has “held back” funds in excess of the exact purchase amount. This can cause you to bounce checks because those funds are not accessible. This is one of the downsides of using debit cards in lieu of credit cards that not many people are aware of.

When you use your debit card at some outdoor gas station terminals, the gas station also typically holds back a larger amount for several days while the transaction settles. There is a gas station near my house that holds $120 every time I fill up my car, albeit on a credit card. My car usually takes $40 to fill up. If I were using a debit card, I would most certainly bounce checks because I don’t keep a lot of money in my checking account (after all, it doesn’t earn any interest there).

The fact that some merchants do this isn’t what irritates people. It’s the fact that they are not overt in their disclosure that they do this. If you knew, perhaps you’d use a credit card instead of a debit card. If you knew, perhaps you would transfer money into the account to ensure a sufficient amount to cover outstanding checks. My guess is you simply didn’t know because your banking institution doesn’t normally tell you.

Imagine how pleased I was to see this sign at the front desk of a Crown Plaza hotel in Irvine, CA. And this wasn’t hidden to the side behind the flowers. It was smack dab in the middle of the front desk for all to see. Kudos to you, Crown Plaza. You might have saved someone a $35 bounced check fee. I’ll be back again because of your standard of care in this matter.

John Ulzheimer – Credit scoring and credit reporting expert and author, John is the President of Consumer Education for Credit.com. Formerly with Equifax and Fair Isaac, John shares his unique insight of the inner workings of credit scoring models and the credit reporting industry on CreditBloggers.com.