Debit Overdrafts - How can they happen?

The most typical ways a Debit Card can result in an overdrawn account are:

1. Floor limits - At certain retail locations such as fast food restaurants, merchants require fast checkout and therefore VISA does not require pre-authorization for transactions below a certain dollar amount, a floor limit. OFCU cannot refuse these types of transactions even if there are insufficient funds to support the dollar amount.

2. Forced-posted transactions - In some situations, for example, when the Point of Sale (POS) terminal is unavailable, a merchant manually processes the transaction without acquiring a required pre-authorization approval. OFCU can initiate charge-backs to recoup funds in these cases but only if the member did not authorize the transaction at the point of sale. In any case the chargeback process costs $25 per item. The cost of processing large numbers of low dollar overdrafts isn't practical. Repeated overdrafts of this type can result in the closure of the members account and the reporting of that closure to Check Systems which could impact your ability to open a deposit account anywhere in the country. In other words, members should maintain a register based on the actual transaction amount, not just look at the available balance.

3. Expiration of the authorization hold period - An authorization hold is the practice within the industry of authorizing electronic transactions and holding this balance as unavailable either until the merchant clears the transaction (also called settlement), or the hold period expires. Typical holds are 5-7 days. If a merchant's clearing (settlement) transaction is not received before expiration of the hold period, the funds are released. If a cardholder is in the habit of looking at the available balance rather than keeping a register, they may assume the item in question has cleared and spend the amount in question. The merchant who has received a prior authorization on the transaction amount must be paid when they submit the settlement transaction which can result in an overdraft. This is typically a problem with smaller retailers who may submit their settlements in a batch process that is not automated.

4. Posting delays - Certain types of merchants, such as hotels and car rental agencies, do several pre-authorizations over a period of time and then post a valid single transaction by adding all pre-authorized transactions together. In these cases, the merchants request multiple reauthorizations in small increments and then post a clearing transaction that includes all the pre-authorized amounts. Sometimes by the time the settlement transaction is posted, the cardholder has already spent the money elsewhere.

5. Settlements exceeding initial authorization- This usually occurs in situations involving hotels where the pre-authorization transaction is less than the posted transaction. For instance, a cardholder may register and be pre-authorized for a 3-night stay at a hotel while actually staying 7 nights and being billed accordingly. Or they may charge significant amounts to the room. If a cardholder is used to looking at their available balance rather than keeping a register, they will not anticipate the effect of the 7 day stay rather than the 3 days.

6. Outside the Rules - Finally there are those retailers that intentionally work outside the rules in an effort to maximize their profits. They neither use floor limits nor authorizations. They simply run the transaction through without even verifying the card is active. As long as the card has not exceeded its expiration date, they will run the transaction. They do this because they know the cost of a chargeback is $25. They are counting on the fact that no institutions will spend $25.00 to recover a low dollar amount charge. Institutions can be forced to pay these amounts even when the card has been shut down.

A few simple ways to avoid overdrafts:

Step 1 -Link your checking account to a Line of Credit or Savings account. When you know your checking account balance isn't enough to cover pending transactions, you can rely on OFCU to transfer funds immediately to prevent an overdraft. OFCU can even pull from your saving account balance before using your Overdraft Line of Credit.

Step 2 - Record check, debit card, and other account transactions daily. Use a good old-fashioned check register or a more contemporary computer program such as Quicken.

Step 3 - Use online banking or daily MyAlerts via online banking but do not simply rely on the available balance to ensure you will have sufficient funds available for any given transaction. Use online banking to keep your check register up to date.

Step 4 - Confirm that electronic deposits such as payroll have actually been credited to your account rather than assuming the credit has been posted. OFCU posts payroll and other electronic deposits on the morning of the transactions effective date.