Debit Card Danger said that making an in-store debit card purchase is by far the most expensive way to overdraft, costing $2.17 for every dollar borrowed. By comparison, check-triggered overdraft loans cost $0.86 per dollar borrowed.

The report analyzed the checking accounts of more than 5,000 customers of the nation's 15 largest banks and found that debit card purchases and ATM withdrawals trigger 46% of high-cost overdraft loans. Written checks, on the other hand, are responsible for just over one-quarter.

The report looked at bank and credit union transactions that were part of a database maintained by Lightspeed Research, a former affiliate of Forrester Research. This "Ultimate Consumer Panel" was originally developed by Forrester Research in 2004 and included data for 5,681 U.S. households whose transaction-level online and offline banking account activity was electronically captured, the Center said.

The dataset contained 18 months of data on 300,000 transactions, the report said.

Although the report said that both credit unions and banks used the practices with which the CRL took issue, Sharon Reuss, spokesman for the Center, noted that the researchers "did not drill down that far" when performing its analysis to determine if credit unions and banks in the data were equal opportunity offenders.

The examples the report provided of the sorts of debit card overdraft problem that it sought to illustrate were all from banks.

In one, a refrigerator repairman who brings home roughly $600 per week got into a great deal of trouble with his debit card. Three days before payday, two checks and several debit card purchases totaling about $105.93, plus a $10 bank fee, puts him over his account balance. As a result, the bank charged him three overdraft fees of $31 each, for a total of $93. With his account now in the negative, on Sept. 28 Customer A makes several debit card purchases totaling $54.63, and is hit with another $31 fee.

In the Center's example, he makes three more debit card purchases the following day totaling $37.56, and a check comes due for $27. The bank responds on the next banking day by charging him two more overdraft fees, upping the rate to $34 each–but also lets him withdraw $200 from its ATM and make a $5.38 convenience store purchase without warning him he is in the red.

That same day is also the repairman's payday and a $633 salary payment is directly deposited into his account. But by this time, he's been hit with so many charges that the paycheck leaves him with a positive balance of only $0.50, the Center said.

"An $8.06 meal at a burger joint the following Monday–the only transaction made on the account since the previous Friday's salary deposit–pushes him back down below zero and results in yet another $34 overdraft fee. Where does Customer A end up? In just six days, he has been allowed to overdraw his account $448.56 and has been charged $226 in overdraft fees. It takes him another week to climb out of the negative balance hole."

Self Help CU, the parent credit union of the Center, noted that in order for this to take place the bank or credit union has to allow the cardholder to make debit transactions when their account is overdrawn, something they and other credit unions may not allow, but which might still happen depending on how the CU processes its card transactions.

For example, Self Help would not be able to implement the Center's recommendations right away because it, like many other CUs, processes its credit and debit card transactions in batches and not in real-time, according to David Beck, policy director for the CU.

Batch processing would effectively prevent the CU from alerting a cardholder to the fact that a given transaction would overdraw their account because the transactions are not processed in real-time, Beck said. In such a situation, the initial inquiry might show that enough money was in the account, but a subsequent offline transaction or check might pull the account into an overdraft situation.

But Beck also noted that Self Help tries to make sure members have already established a savings account that can be used to cover any potential overdrafts before they occur.

Self Help does charge a $25.00 fee for overdrafts, but only a 15% annual percentage rate for overdraft protection loans which are given in $50 increments, costing roughly $.50 if they are repaid promptly.

Halperin pointed out that even where a financial institution processes card transactions in batches there is still an opportunity, when an inquiry is sent as part of the approval process, to let the cardholder know if there is not enough money in their account to cover the transaction.

What the report illustrates is that overdraft protection may not be appropriate for electronic transactions, Halperin noted. When overdraft protection was put into place it made a good deal of sense for the account holder because it prevented them from being charged fees for insufficient funds because of bounced checks from the retailer as well as from the institution.

But with electronic transactions, the financial institution has the option to decline the transaction unless the account holder takes the proactive step of putting some arrangement into place, such as linking a savings account, to provide a real solution to possible overdraft, Halperin noted.

"It's unclear that overdraft protection for electronic transactions makes as much sense," he said.

Halperin said that the Center would probably do more analysis and be able to differentiate more in future reports between credit unions' use of overdraft protection products and that of banks. –[email protected]