“Overdraft on ATM withdrawals and debit purchases is a debt trap that pushes lower income people out of the banking system,” said Josh Zinner, co-director of New Economy Project. “Regulators should ban this.”

The Psychological Underpinnings of Overdraft: Ego And Head-Scratching

It all comes down to a matter of hubris and confusion.

The tendency to make debit card purchases with money that’s not in an account is not about frivolous spending: the GOBankingRates study found that 23% of consumers who overdraft do so, because they say they need to make a purchase. But that purchasing power can lead to an inflated sense of self.

“Feelings of grandiosity and omnipotence pump up consumers when they get that high,” said Dr. Jeanette Raymond, licensed psychologist and author. “In the moment, they believe that nothing bad can happen or will happen just like a junkie on a fix who thinks he can jump off a tall building and survive without injury. Risk taking is intoxicating.”

Adding fuel to the fire of self-aggrandizement is confusion. The information provided by the nation’s biggest banks are inscrutable despite overdraft opt in rules, according to data released by four housing organizations, including the California Reinvestment Coalition (CRC) of Oakland.

“Overdraft opt-in rules are clearly not enough to protect consumers from this expensive product,” said Paulina Gonzalez, executive director with the CRC.

Under overdraft opt in rules, banks are required to allow debit card customers to opt-in to overdraft fees rather than automatically enrolling card users in programs that charge some $30 when there are insufficient funds to cover purchases. As a result, consumers could have their debit cards denied at the cash register if they do not opt in and attempt to buy without enough money in their accounts to cover the cost.

Regulatory Counter-Attack

The New Economy Project of New York, the Reinvestment Partners of Durham and the Woodstock Institute in Chicago are calling upon federal banking regulators and the Consumer Financial Protection Bureau (CFPB) to strengthen consumer protections for all overdraft products.

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