What is a debit card?

A debit card is a payment card that’s typically linked to your checking account and can be used to make purchases using your available funds.

When you open a new checking account, most banks and credit unions will issue you a debit card that allows you to draw money and make payments from the account. You can use the card to buy products or services in stores and online — the same way you’d use a credit card or cash.

In this article, we’ll review what you need to know about debit cards, how they work and why you may want to use one.

• How does a debit card work?
• How do you get a debit card?
• How is a debit card different from a credit card?
• Is a debit card different from an ATM card?
• Should you use a debit card or cash?
• What are the benefits of using a debit card?
• What fees does a debit card have?
• How secure is a debit card?

How does a debit card work?

A debit card is a magnetized and/or chip-enabled plastic card that’s connected to a checking account. This card is usually programmed with a personal identification number, or PIN, that you choose and then use to complete transactions — at a store, online or at an ATM where you can withdraw money, check your balance or (in some cases) make deposits.

To pay for purchases, you either swipe your debit card, tap it against or insert it into a card reader. Depending on the purchase, you may or may not need to enter your PIN. Upon approval, the funds get subtracted from your checking account balance to cover the transaction.

How do you get a debit card?

Your bank will usually offer you a debit card when you open a new account. Banks often provide these cards without cost, though some charge a fee to replace a debit card.

If you don’t have a bank account, you can sign up for a prepaid debit card through a number of different companies and institutions. But note that prepaid debit cards usually charge monthly fees or transaction fees (or both), which can eat into your balance.

How is a debit card different from a credit card?

You can use a debit or a credit card to make payments and purchases without needing to carry around cash. But even though they look and even function similarly, there are key differences between the two.

Here are a few important ways that debit cards and credit cards are different.

Source of funds

Your bank account funds your debit card, so when you use the card for a transaction, the funds are withdrawn from your account’s available balance. If you don’t have enough money in your account, the bank may decline the transaction, or you could be charged a penalty fee for overdrawing your account (bringing your balance below zero).

Credit cards, on the other hand, allow cardholders to borrow money, which you can use for purchases, cash advances and balance transfers, up to your established card limit. The debt is repaid in the future.

You can pay off the balance on a credit card in full at the end of the billing cycle, which allows you to avoid interest charges. Or you can carry the balance from one month to the next, allowing you to pay off the charges over time. But you’ll pay interest on the balance.

Limits

The available funds in your bank account balance generally determine your debit card spending limit. While some banks will allow you to overdraw your account (spend more than you have deposited, bringing your account balance below zero), this is meant to be a safety net rather than the rule. Overdraft fees typically apply, and you’ll need to repay the overdrawn amount as well.

With a credit card, you’ll be assigned a credit limit based on factors such as your ability to take on more credit, income and payment history. This limit is the most that you can charge to your account at a given time.

Interest rate

The purchases made with a debit card don’t incur any interest charges, as you’re simply spending the funds that you already have available in your account. You’re not borrowing anything.

But with a credit card, if you don’t pay your balance in full by the due date and choose to carry a balance from one month to the next, you’ll incur finance charges. This interest adds to your account balance and compounds over time.

Credit reporting

Neither bank accounts nor credit unions report checking and savings accounts to the credit bureaus, so your everyday debit card activity won’t affect your credit scores. If you’re trying to establish or build your credit history, this can definitely be a downside.

The exception to this can be utility bills. Some utility companies will opt to report account activity to the credit bureaus, which can affect your credit reports and scores. Paying utility bills with your debit card could indirectly affect your credit.

Credit card issuers, on the other hand, typically report your account balance, credit limit and payment information to the credit bureaus each month. This can affect your credit reports positively or negatively, depending on the balance you carry and whether you pay your bill on time.

Benefits

Many credit cards offer some sort of rewards, protections, benefits or some combination of these. Some cards offer travel benefits such as trip insurance and free checked bags, while others may reward you with cashback on everyday purchases. These days, credit card benefits play a notable role in consumer satisfaction and may even be the reason some customers choose one credit card over another.

Though it’s not the standard, some debit cards also offer rewards — especially cash back or points on purchases — to attract people and boost satisfaction. But it’s still much less common to see debit card rewards programs than credit card incentives. Plus, debit card programs are usually rewards based and don’t offer things like travel credits and trip insurance.

Is a debit card different from an ATM card?

Banks and credit unions may offer both debit cards and ATM cards to people who hold checking or savings accounts at that bank. Both cards can be used at ATMs to withdraw funds, check account balances and (in some cases) make deposits. Depending on the bank, they can each be linked to a checking account, a savings account or even a money market account, offering you access to your funds on the go.

But ATM cards and debit cards are also quite different.

ATM cards are PIN-based. You can use them to check the balance of, withdraw money from, or deposit money into your bank account. You can’t use ATM cards to make purchases directly from a merchant.

Debit cards are PIN-based and can be used at ATMs too, but they also allow for purchases and payments to be made directly. They may also be chip-enabled and be connected to the Visa or Mastercard network for added accessibility and security.

Overdraft protection is typically available only for debit card purchases. You can’t use an ATM card to overdraw cash from an ATM.

Image: mned_debitcard

Should you use a debit card or cash?

Choosing whether to use a debit card or cash for a payment or purchase comes down to a few key factors: preference, convenience and security.

Cash can be convenient, allowing you to make purchases at shops that may not accept card payments or with small local vendors. You also don’t have to worry about fees or your card being compromised.

On the other hand, debit cards offer more security than cash. If you were to lose a wallet full of cash, you’d be out of luck unless somebody found it and returned it to you. If your debit card is lost or stolen, though, you’re only liable for up to $50 in fraudulent transactions if you report the loss — and $0 if you report your card stolen before it’s ever used.

Lastly, using a debit card may be easier for some people than carrying around a stack of cash, especially for large purchases. Some debit cards also offer rewards and benefits — such as points or cash back — that may not be available when you pay with cash.

What are the benefits of using a debit card?

• Debit cards can make it simpler to track spending. With online portals and smartphone apps, it’s easy to see transactions almost immediately. This allows you to watch your account balance, track spending and even stay on budget.
• Debit cards are more convenient than cash. As we mentioned, using a debit card can be much safer than carrying around a bunch of cash — and not just because a card can be reported stolen or missing and deactivated. Carrying a debit card also means you don’t have to go out of your way to withdraw cash from an ATM or local bank branch since you can use a debit card to make purchases almost anywhere.
• Compared to credit cards, debit cards may help you avoid debt and overspending. Credit cards allow you to borrow money that you’ll pay back later. Because of this, credit cards can enable overspending and debt for many account holders. With debit cards, though, you’re limited to the cash you have in your account — excluding features such as overdraft protection — making it easier to track spending and limit purchases.
• You won’t be charged interest on debit card purchases. Since you aren’t borrowing money to pay for purchases when using a debit card, you also won’t be charged interest on purchases made. But with a credit card, you’ll usually accrue interest on the account balance if it’s not paid in full on or before the statement due date.

What fees does a debit card have?

As a debit card user, you won’t have to worry about interest charges on transactions made with your card. But there are other fees to pay attention to. Luckily, most of them can be avoided.

• Monthly maintenance fees — Debit cards are typically issued when you open a new checking or savings account, and some banks and credit unions charge monthly fees to maintain those accounts. But you can often avoid monthly maintenance fees by keeping a minimum balance in the account each month, conducting a minimum number of transactions from the account or receiving ACH payments into the account. Or you can look for a bank that doesn’t charge maintenance fees at all.
• Out-of-network ATM fees — If you use your card to get cash from an ATM that’s not in your bank’s network, you may be charged a fee from that network and, in some cases, from your bank as well. You can avoid these fees by using ATMs within your bank’s network or by choosing a bank that offers ATM fee reimbursement.
• Overdraft fees — Your bank or credit union may offer overdraft protection, which you can usually choose to opt into or decline. If you opt in and make a purchase that overdraws your account, your bank or credit union may charge you an overdraft fee for the convenience of approving that transaction (even though there’s not enough money in your account), in addition to making you repay the overage. To avoid this fee, you can opt out of overdraft protection — this would result in a denied transaction if the funds aren’t available. Or you can link another account to your checking account so that you or your institution can transfer funds as needed.
• Nonsufficient funds fees — If you make a purchase with your debit card that exceeds your account’s balance, your bank will either approve it (if you have overdraft protection) or decline it. If it’s declined because of insufficient funds, you may be charged an NSF fee. You can avoid this fee by enrolling in overdraft protection or by transferring funds into the account as needed to ensure an adequate balance.
• Transaction fees — Some financial institutions charge a transaction fee if you use your PIN, or personal identification number, rather than your signature when making a purchase with your debit card. To avoid this fee, you can run your debit card “as credit,” if it’s a Visa- or Mastercard-branded card and opt for a signature transaction, rather than a PIN-based one.

How secure is a debit card?

What do you do if your debit card is lost or stolen? And just how secure is that debit card in the first place?

If you have a debit card that’s linked to your checking account, it’s possible for an unauthorized user to gain access to your account — and the money in it — if it falls into the wrong hands. Fortunately, the Electronic Fund Transfer Act gives some protection to consumers that can help limit your liability for fraudulent charges — but you’d have to act fast in reporting your card as lost or stolen.

If you report your debit card missing before any unauthorized charges are made, you’re not responsible for unauthorized transactions. If you report it lost or stolen within two business days of learning about the loss or theft, your maximum financial loss is the lesser of $50 or the total amount of unauthorized transfers. If you wait even longer, you could be on the hook for $500 or more.

If you still have your card in your possession when someone uses it without permission, you aren’t liable for any unauthorized transactions — as long as you report the fraudulent activity within 60 calendar days of being sent an account statement with the first appearance of an unauthorized transfer.

To help keep your account safe, consider setting up alerts to notify you when fraud is suspected if this is something that’s offered by your bank or credit union. And be sure to regularly review your account statements carefully for purchases you didn’t make so you can report problems right away.

Bottom line

Debit cards can be a convenient alternative to using cash for everyday purchases, and they can also help you keep your spending in check.

Choosing whether to use a debit card, cash or even a credit card, though — or a mixture of all three — may depend on your personal spending habits, preferences and even your level of self-discipline.

You might need to carry cash for tips or because it helps you avoid overspending. Debit cards may make the most sense for you because you’re able to monitor your account balance while protecting your funds. Or maybe credit cards are ideal for you as they often offer lucrative benefits and rewards.

For many, it makes the most sense to carry a combination of all three payment methods. That way, you can base your payment method on your location, circumstances and even your budget situation. And no matter which payment method you choose for your purchases, it’s always important to watch your accounts for new activity so you can quickly spot fraudulent activity, catch unauthorized charges and keep an eye on your budget.