What is a debit card?

Definition and example of a debit card

How a debit card works

Alternatives to debit cards

Debit card vs. credit card

Definition and example of a debit card

A debit card is like an ATM card with the functions of a credit card. The noticeable difference is that when you purchase something with a debit card, the amount is drawn directly from your checking account. Banks can issue you either a debit card or a credit card, but these plastic payment options do not work in the same way. The main difference is that a debit card is a type of bank card linked to your checking account.

How a debit card works

Debit cards can be used at ATMs to withdraw cash directly from your bank account or to pay for goods and services at stores that accept credit cards. The biggest advantage of a debit card over credit cards is that you do not borrow money when using it, which helps you stay away from debt.

You may have to keep a larger amount in your bank account if you use a debit card at a hotel or to rent a car to cover the estimated stay cost and any additional charges that may accrue. You should maintain a balance greater than the purchase amount in your checking account if you plan to use a debit card to pay for hotel costs or car rentals to avoid the card being declined due to a hold that exceeds your current balance.

To use a debit card, swipe the card at the merchant’s card reader and enter the personal identification number (PIN) you received from the bank on the keypad. If the transaction is approved, a hold will be placed on your checking account, reducing your account balance by the transaction amount. The bank may show the transaction as “pending” until the funds are transferred from your account to the merchant. At this point, it will appear as a posted transaction. You may have a pending transaction for three to four days, but wait times can vary by bank.

It is possible to overdraft your account if you choose to opt into overdraft protection. You will incur an overdraft fee, usually around $35. This means you can successfully make a purchase even if you do not have the funds in your account to cover the cost. Overdraft fees are what the bank charges to allow your balance to go below zero.

By choosing not to take advantage of overdraft protection, your card will be declined if you try to make a purchase when you do not have enough funds. In this case, you will not have to pay an overdraft fee.

Alternatives to debit cards

Some people may prefer to pay with cash or write checks, and checks draw funds from the same checking account as a debit card.

When you need to pay with a plastic card, there are benefits to using a credit card instead of a debit card. If used responsibly and you pay off the balances each month, they can help build credit.

Fraud protection for credit cards is typically stronger than for debit cards. If your card is actually stolen, contact the bank immediately. Whether you have a debit or credit card, no unauthorized charges will be counted against your account after contacting the bank. After that, credit cards tend to have better protections. The maximum amount you are responsible for with a credit card is $50, but for debit cards, that amount can go up to $500 if it takes more than two days before you can report the fraud. Your liability with credit cards is $0 if only the numbers are stolen and you still have the card.

Additionally

To that end, a stolen debit card is often more inconvenient even if you aren’t responsible for the charges. The money is withdrawn directly from your checking account, and it takes some time before it is refunded. With a credit card, you do not lose access to any of your cash – just the use of the card until a new one is issued.

Debit Card vs. Credit Card

A debit card does not increase debt, while a credit line helps manage unexpected expenses but can increase debt.

A debit card can be used in places where payment by credit cards is necessary, but using it will not contribute to improving your credit score. In contrast, responsible use of a credit card can help improve credit scores.

Fraud protection for credit cards is usually stronger than for debit cards. If your card is actually stolen, contact the bank immediately. Whether you have a debit card or a credit card, no unauthorized charges will be counted against your account after you contact the bank. After that, credit card protections are preferable. The maximum amount you are responsible for with a credit card is $50, but for debit cards, this amount can reach $500 if it takes more than two days before you can report the fraud. Your liability with credit cards is $0 if only the numbers are stolen and you still have the card.

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Sources:

Consumer.gov. “Using Debit Cards.”

Federal Trade Commission. “When a Company Blocks Your Credit or Debit Card.”

Element Federal Credit Union. “Debit Card Holds and Issues Explained.”

Consumer Financial Protection Bureau. “A Closer Look: Overdraft and the Impact of Opting-In,” Page 1.

MyFICO. “What Is Amounts Owed?”

Federal Trade Commission. “Lost or Stolen Credit, ATM, and Debit Cards.”

Source: https://www.thebalancemoney.com/what-is-a-debit-card-2385853