Understanding ATM, Debit, and Credit Cards

A pile of ATM, debit and credit cards
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When you open a checking account, your bank typically furnishes you with a free ATM card that may be used to make cash withdrawals and deposits, transfer funds between accounts, and check account balances. Some ATM cards also function as debit cards, which may be used to make purchases online and at retail establishments. Such cards have visible Visa, Mastercard, Discover, or American Express logos.

These cards are often interchangeable with credit cards, but they are not exactly the same. Let's explore the distinctions between them, along with the best uses for each card.

ATM Cards

Automated Teller Machine (ATM) cards are the simplest cards. They are offered by banks and some credit unions and are primarily used to withdraw cash and make basic banking transactions at ATMs located in many places. Most issuers will charge a user fee if the card is used to withdraw funds from a different bank. These cards typically cannot be used to make purchases at stores, as they do not have the major credit card network logos on them.

Ideal for: Access to cash, limiting everyday spending

Debit Cards

Debit cards, also known as check cards, do everything ATM cards do but can also be used for purchases anywhere credit cards are accepted, including retail stores and online sites. The funds from these transactions are taken directly from your checking account. The issuer of these cards will often charge a monthly fee for the convenience of using the debit card instead of paper checks.

Ideal for: Substitute for checks, some everyday purchases, access to cash

Debit cards can be used in place of credit cards, but there are some things to be aware of when using a debit card to pay for rental cars and hotel stays, where the bill totals can be calculated only after you return your car or check out of your room. These billers may place an authorization hold on your account, which can tie up your checking account's funds.

Prepaid Debit Cards

Prepaid debit cards are similar to standard debit cards, but instead of pulling funds from a checking account, you “load” funds into an account with the prepaid debit card issuer. This may be done either by setting up direct deposit, adding funds with an electronic transfer or an in-person deposit, or using a mobile check deposit. You can then spend from the card until you’ve used up the money you loaded.

It is relatively easy to qualify for prepaid cards, making them an attractive option for those who have experienced difficulty opening a bank account. On the downside, prepaid debit cards can come with a lot of fees, and they’re not as useful as fully functioning debit cards. If you forget to reload the card, it's not very useful in a pinch.

Ideal for: When you can't qualify for a bank account or credit card, limiting your spending,

Credit Cards

Credit cards let you borrow from your credit card issuer. Funds do not come directly out of your checking account. You will have a loan balance for any advance you take that you must pay off at a later date. Since it's a loan, your credit card comes with interest charges. However, if you pay the entire balance on time every month, you can usually avoid paying interest (and late payment fees).

For everyday spending, credit cards are safer than debit cards for the following reasons:

  • If somebody steals your debit card or obtains your card number, they can immediately drain your checking account, making it potentially difficult for you to pay bills.
  • Credit cards offer superior consumer protection against fraud by limiting your losses to $50, under federal law, for unauthorized charges. While most debit cards likewise protect against fraud and errors, federal law is not as generous with debit card loss limits.

But credit cards also have drawbacks. Chief among them: They may tempt you to spend beyond your means and end up with a pile of high-interest debt. This also results in damage to your credit report, which can make it more difficult for you to secure important loans, such as a mortgage.

Ideal for: Everyday purchases, building good credit

The Bottom Line

Most consumers will have at least a couple of these cards in their wallets. Knowing when to use each one will make it easier to manage your finances and avoid unnecessary fees and interest, and it will keep your money safe.

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Article Sources

  1. FTC. "Lost or Stolen Credit, ATM, and Debit Cards." Accessed March 26, 2020.

  2. Experian. "What Affects Your Credit Scores?" Accessed March 26, 2020.