How do Debit Cards work?
A debit card is usually a rectangular piece of plastic similar to any debit card. It links to the user’s checking account at the bank or credit union. The amount of money that can be spent with it is related to the account size (the amount of money in the account).
In a sense, a debit card is a cross between an ATM card and a credit card. You can use them to withdraw cash from bank ATMs, just like the former, and you can use them to shop, just like the latter. Many financial institutions are replacing regular single-purpose ATM cards with debit cards issued by major card payment processors such as Visa or Mastercard. Such a debit card will automatically come with your checking account.
Whether used to get cash or buy something, a debit card does the same thing: it instantly withdraws funds from a secondary account. Therefore, your spending is limited to the amount available in your checking account, the exact amount you have to spend and your account balance fluctuates from day today.
Debit cards also usually have a daily purchase limit, which means you can’t spend more than a certain amount in 24 hours.
Debit card purchases can be made with or without a PIN. If the credit card has a major payment processor logo, it can usually run without one, just like a credit card would.
How Debit Cards Work
Debit card fees
Overall, there are no extra fees for debit cards: no annual membership fees or cash upfront fees.
However, they don’t always allow you to escape the fee entirely: if you withdraw cash from an ATM other than the bank or affiliated bank that issued your debit card, you may be charged an ATM transaction fee.
What if you spend more with the card than you have in your account? You may be hit with insufficient funds, similar to a declined paper check. If you have signed up for overdraft protection, you will be responsible for overdraft fees;
You may also be charged a replacement card fee if your credit card is lost, damaged, or stolen, and a foreign exchange transaction fee if you purchased in foreign currency.
Note: All of this applies to regular debit cards, which pay with funds in your checking account. A prepaid debit card that has a certain amount of money is different, it’s almost a completely different animal.
A prepaid debit card is similar to a gift card: it allows you to spend the amount already loaded on the card until the balance is used up. Some of them are rechargeable, so they can be used indefinitely, just like regular debit cards. Unlike regular debit cards their regular cousins, though, prepaid debit cards often come with a slew of additional fees: monthly fees, transaction fees, ATM fees, exchange fees, foreign transaction fees, and sometimes even a fee to check the card’s balance.
Debit and Credit Cards
Given that many bank debit cards are issued by credit card companies, the difference between a credit card and a debit card can seem as thin as a piece of plastic. For example, a debit Mastercard looks identical to a credit Mastercard, except for the word “debit” on the front, and “can be used anywhere Mastercard is accepted”;
Some debit cards offer rewards programs similar to credit card rewards programs, such as 1% cashback on all purchases. Debit cards with the credit card issuer’s logo offer many of the same consumer information protections. For example, if someone swiped your card number to make a fraudulent purchase, you’re not liable for it.
But credit and debit cards work in fundamentally different ways. Shopping with a debit card is like writing a check or a wad of bills: Now and then, you pay with funds in your bank account. When you use a credit card, you are borrowing money from the credit card company to buy something. It pays the merchant and then pays you the amount. You have to pay it back when you get your monthly statement. If you don’t pay the full amount, you pay the rest of the interest you would with any loan.
You can withdraw cash with debit and credit cards. But again, when you get money from your credit card, you’re borrowing money, as “cash advance” implies. If you use your credit card to withdraw cash at an ATM, the money is not coming out of your bank account, but from your credit card account. If you have a balance, you pay interest, that is, don’t pay it back (and sometimes even you) right away.
You don’t have a balance on your debit card because every time you use it, you pay in full, or withdraw money that’s already yours. The best part is that a debit card doesn’t put you in debt, and you can’t spend more than you have. The downside is how much you are limited to your account. This makes credit cards a better option for larger purchases you want or need financing.
Pros and cons of debit cards
With a debit card, consumers are shopping with cash, that is, with the money they have, rather than borrowing with a credit card. But they are much safer than cash. Every transaction made with a debit or check card will appear on the account holder’s monthly statement, allowing for easy “see money flow”;
When the lost or stolen cash is gone forever, a lost or stolen debit card can be reported to the bank, which can deactivate the card, delete any fraudulent transactions from the cardholder’s account, and issue a new Card.
If you have bad credit, a debit card is easier to get, as long as the bank allows you to open an account, you are in the bank, you don’t have to apply for a debit card like a credit card. You also don’t pay an annual fee. Because debit cards don’t charge merchants much, merchants don’t impose minimum purchase amounts on debit cards, as they usually do with credit cards.
Note that debit cards generally don’t offer as many perks or as many fraud prevention measures as credit cards. On the one hand, if an identity thief gets into your actual bank account and withdraws the funds, you lose that money immediately. Refunds can be difficult.
Also, your spending on your debit card is limited to your bank deposits. Plus, with automatic payments, automatic deposits, and ATM withdrawals, it’s hard to remember how much money is in a checking account at any given time, making shopping with a debit card tricky. Your card may be declined, or you may incur overdraft charges.
favorable opinion
- Safer than cash
- no debt
- Easy to obtain without application
Cheat
- Limit spending to bank deposits and/or daily amounts
- prone to overdraft fees
- Fewer benefits and protections than credit cards
Debit Card FAQ
What are the features of a debit card?
Debit cards come with PINs that allow you to withdraw cash from ATMs. They also let you buy goods and services. If they are from a credit card issuer, they may offer cashback programs and other perks associated with regular credit cards.
Do debit cards have purchase protection?
It can vary depending on the card issuer, but in general, debit cards offer no purchase protection, or purchase protection like credit cards do. If your card is stolen or used illegally, your liability is much greater and the reporting time with a debit card is much shorter. 2
Can I apply for a debit card online?
Yes, you can get a debit card online at any financial institution that allows you to open a checking account online. Of course, this also applies to online banks, as well as those brick-and-mortar banks that register people digitally.
Can you be 12 and have a debit card?
It depends on the bank. At most financial institutions in the United States, minors (under the age of 18) cannot open a checking account without a parent or legal guardian. They can open an escrow account, but to have a debit card in their name, they usually have to be at least 13 years old. Still, some banks offer credit cards to children under the age of 13 (in the name of adults). Kids can get a prepaid debit card at almost any age.
What is the difference between a loan transaction?
In a debit transaction, the money is debited from the account immediately or within a few hours. A credit transaction creates a balance that needs to be settled in whole or in part in the future.
Somewhat confusingly, people who use debit cards sometimes choose to “credit” or “debit” when making a purchase. This difference mostly happens behind the scenes. If you choose a “debit” transaction, you can use your PIN (personal identification number) to authorize the purchase, and the merchant will instantly communicate with your financial institution to transfer funds in real-time.
If you choose a “credit” transaction, you can authorize the purchase with your signature. The merchant communicates with the credit card processor and then debits the funds from your bank account – a process that can take two to three days. So it takes longer for funds to leave your account.
Bottom line
Debit cards are issued by banks or credit unions to checking account holders. It allows them to withdraw money from ATMs, or buy goods or services, such as credit cards. Funds are debited immediately, or within a short period, so the amount available to spend reflects the amount in the linked account.
Unlike credit cards, debit cards do not allow users to go into debt unless the account holder signs up for a credit card, potentially incurring small negative balance overdraft protection. Debit cards usually have a daily purchase limit, which means making particularly large purchases may not be possible.
Debit cards work best as a tool for getting cash or making small purchases. While it ensures you don’t get into debt, you can only spend what you have, and it doesn’t help build your credit history, much like a credit card. Credit cards are better for big purchases that you can’t or don’t want to pay in full right away.
