What Is A Debit Card?

Using a debit card can be a very quick and convenient way to pay for everyday transactions, compared to writing checks or counting out cash and coins. But, what exactly is a debit card, and does it work any differently from a credit card?

Whether you’re looking to start using a debit card for the first time or just trying to understand how they work, here are a few things you need to know.

Debit Card Definition

A debit card is a plastic card that can be used as a method of payment for transactions both in person and online. It can be used to purchase goods and services or retrieve cash from an automated teller machine (ATM) or merchant that allows cashback.

Thanks to their ease of use, debit cards have begun to largely replace check transactions – and to some extent, cash transactions as well. A debit card can also eliminate the necessity of carrying checks or cash around on your person, which can be both safer and more convenient.

How Does A Debit Card Work?

When you use a debit card, the money doesn’t come from the void, nor is it borrowed – debit cards are typically linked to your personal bank account.

When you make a purchase using a debit card, you swipe, insert, or tap it on a card reading device and then enter your personal identification number (security PIN) to verify your identity. You can also enter the card’s details into a checkout form online if you’re making a purchase digitally. Once this is done, a point-of-sale system (POS system) takes the information from your card and passes on the details of the transaction to whomever your card’s processing network is – Visa, Mastercard, American Express, etc.

Once this happens, a few things follow. The processing network will try to make sure your transaction isn’t fraudulent or suspicious. Then, the transaction information is sent to the bank or financial institution your checking account is tied to. The bank makes sure your account has enough money to cover the transaction – and if you have enough, the transaction is approved and goes through. If you don’t, you’ll usually be declined by the card reading machine. All of this typically happens within the span of a few seconds – impressive, right?

You can spend as much money as you have in your account – though some debit cards may have a daily spending limit. The limit is typically proportional to the amount of money you have in the account tied to the card, and if you overspend, your card may be declined.

Prepaid Debit Card

A prepaid debit card is another type of payment card that allows you to pay with your own unborrowed cash in a card transaction. Unlike a regular debit card, however, you must load money onto a prepaid debit card – and you can only spend what’s been loaded onto it. These cards are sometimes called stored-value cards and can be useful for those looking to stick to a budget or perhaps grant their children a specified allowance to spend.

If you’ve spent everything on a prepaid card, your transactions will be declined until the card is reloaded.

Debit Card Vs. Credit Card

So, how are debit cards any different from credit cards? The biggest difference between these two types of payment cards is that debit cards take money straight out of your bank account to be used in transactions, or from a loaded balance if you’re using a prepaid card. Credit cards, on the other hand, charge your purchases to a line of credit that you must repay, or the debt accrues interest over time. Some credit cards also offer various rewards for spending, which many debit cards do not offer – though there are some that do.

So, which is better to have? Most people that pay via card likely have at least one credit card as well as a debit card – so you don’t have to choose between them. Regardless, let’s go over a few of the perks and downsides of both types of payment card.

Debit Card Pros

• There usually aren’t annual fees associated with debit cards – you can just spend your money without worrying about being charged for using the card unless you incur some kind of penalty fee for overspending or using certain ATMs.
• Money is automatically withdrawn from your account when you use a debit card, so there’s no need to worry about remembering to repay debt like you would with a credit card.
• Since you’ll be declined if you don’t have enough money to cover a purchase, there’s little chance of spending beyond your means and incurring debt.
• Debit cards do not impact your credit score, so you can get and use one even if you have poor credit.
• Using a debit card can be safer than using cash. When carrying cash, if it’s stolen from you, you won’t get it back. If someone steals your debit card, however, you likely have some protections that can help you regain your losses.
• You don’t actually even need to carry your debit card with you in some cases – it can be linked to peer-to-peer payment apps such as Venmo that you can use from your phone.

Debit Card Cons

• Since debit cards typically have a limit for how much you can spend in a day, it can be difficult to use them to make big purchases.
• If you need to make a purchase that exceeds even slightly the amount of money you have in your account, you’ll likely be declined.
• Debit cards often have little to no member perks for using your card, unlike credit cards which can grant you airline miles and a percentage cash back on every purchase, among other things.
• Using a debit card doesn’t impact your credit in any way – meaning if you use your debit card to pay for everything, you aren’t building credit.

Credit Card Pros

• If you have an emergency and don’t have enough money in your account to cover it immediately, you can still make the purchase with a credit card and repay the balance later.
• If you need to make a large purchase that exceeds your debit card spending limit, you can typically make it with a credit card unless it exceeds your credit limit.
• Many credit cards come with rewards systems that allow you to earn airline miles or a percentage of cashback on every purchase.
• Credit cards allow you to actually improve your credit score by spending and repaying debt responsibly, unlike debit cards.
• Credit cards tend to have better protection against fraud. When your debit card is stolen, the money spent will be directly yours – but when your credit card is stolen, the credit being used isn’t coming straight out of your bank account. Many credit card companies also have zero liability policies, meaning if your card is stolen, you aren’t responsible for the debt that is incurred.

Credit Card Cons

• Since you have the ability to spend beyond your means, credit cards make it easy to go into debt that you may struggle more and more to repay as it accrues interest.
• You’re charged interest on your credit card balance, so if you don’t pay it off every month, your debt actually increases.
• It can be difficult to get a “good” credit card with a reasonable interest rate if you have a poor credit score.
• Some credit cards have minimum spend requirements to earn the bonuses they offer – meaning you have to spend a certain amount of money to access the perks offered to you.

Debit Card Fees

What kinds of fees can you expect to pay with a debit card? Unlike credit cards — which may charge annual fees as well as a number of other penalties and extra costs depending on how you use the card — debit cards have very few fees associated with them. You won’t have to pay any annual fees or other costs typically involved with maintaining a credit card, but you can expect to pay:

• ATM fees: If you use an ATM that doesn’t belong to your bank, you’ll likely be charged.
• Overdraft fees: Typically, when you attempt to spend beyond what’s in your account you’ll simply be declined, but depending on how much your attempted purchase goes over, you may be able to make the purchase still – but you’ll be charged a fee for spending beyond your account. This fee can be avoided in some cases if you link your savings and checking accounts so that if you spend all of your checking account balance, money is transferred from your savings account.
• Insufficient funds fee: Some financial institutions may actually charge you a fee if your card is declined.
• Replacement card fees: If your credit card is lost or stolen, you may have to pay a fee to get a new one sent to you.

How To Get A Debit Card

Getting a debit card is a fairly simple process. All you have to do, typically, is open a checking or savings account through a bank or other financial institution and then request a debit card tied to the account of your choosing.

You may need to have a minimum balance to open an account and connect a debit card. If you meet the requirement, you can have a debit card sent to you in a matter of weeks – or sometimes given to you same-day by your bank or financial institution.

Once you receive your card, you can activate it and start using it right away. To activate your card, you’ll have to call a number given to you by your financial institution or visit a website. Once this is done, you are assigned or get to choose a four-number pin that you can use to verify your identity when using your card. Be sure not to use any easily found numbers associated with yourself as your pin – including your birthday, birth year, Social Security number or phone number.

The Bottom Line: Using A Debit Card For Your Financial Needs

A debit card can be a safe, useful and convenient way to approach your transactions if you’re interested in cutting down on your use of cash, checks or even credit. Like any method of payment, however, debit cards have their own pros and cons that you should consider before using one.

To learn more about personal finance and how to make the most of your money, visit our Rocket HQ^SM Financial Learning Center.