What Is a Debit Card?
Your bank may issue you a debit card or credit card, but these plastic payment options don't function the same way. Crucially, a debit card is a type of bank card that is linked to your checking account.
Understanding what a debit card affords in terms of convenience and how it works can help you choose the correct card for your needs and use it responsibly on the things that matter.
How a Debit Card Works
You can use one of these cards to withdraw cash at ATMs or make purchases at the same physical and online stores where a credit card is accepted, all without having to write a check or carry cash. But the notable difference in the definition of debit cards and credit cards is that when you buy something with a debit card, the money comes directly out of your checking account. The biggest advantage: You're not borrowing money as you are when you use a credit card, which can keep you out of debt.
To use your debit card, swipe the card in a merchant's card reader and enter the personal identification number (PIN) that you received from the bank on the keypad. If the transaction is approved, a pre-authorization hold will be placed on your checking account that reduces your account balance by the amount of the transaction. Your bank may show the transaction as "pending" until the money is transferred from your account to the merchant. At this point, it will show up as a cleared transaction. You may have a transaction listed as pending for three to four days, but hold periods can vary by bank.
If you use your debit card at a hotel or for a car rental, the company may put a larger hold on the account to cover the estimated cost of the stay and incidental, or extra, costs you might accrue (for food or beverages, for example). Keep more than the amount of your purchase in your checking account if you plan to use your debit card to pay for a hotel or a car rental to avoid a situation in which your card is declined because of a hold in excess of your current balance.
Spotting Debit Card Transactions on Your Statement
When you view your monthly checking account statement, the transactions you make with a debit card show up as point-of-sale transactions, each of which shows when and where you used the card and how much you spent.
If you see an ACH transaction, this refers to a type of payment that moves from one bank to another through the Automated Clearing House Network; this means that the money was directly debited from your account and that you did not use your debit card to complete your transaction.
Understanding how to identify debit card transactions in a bank statement can help you if you are trying to find out if someone accessed your account without your permission. It can also help you identify spending that isn't labeled correctly or as you expected—if your local fast food restaurant is doing business under another name, for example.
Overdrawing Your Account With a Debit Card
By definition, these cards don't permit you to borrow money and repay it at a later date in the way that credit cards do. But it's still possible to overdraw your account, or spend in excess of your balance, if you don't enough funds to cover the cost of a debit card transaction. If you "opt in" to your bank's overdraft protection service, the bank will pay for each debit card or ATM transaction up to a certain dollar amount, but will then charge you an overdraft fee of around $35 for each transaction that they pay into the negative. If you don't opt in to overdraft protection, you generally won't pay an overdraft fee for debit-based transactions, but your debit card will be declined and you'll have to fund your purchase in another way.
You can also find yourself overdrawn and paying overdraft charges if your bank pays for a check or a recurring payment like an ACH. But if the bank returns a check or ACH transaction unpaid, it may still charge what is known as a non-sufficient funds (NSF) fee, which is equivalent to the overdraft fee you pay for debit and ATM purchases.
Keeping a running balance on your checking account can tell you how much money you have available to you at any time and reduce the likelihood of incurring overdraft charges. You can easily track your debit purchases throughout the month on paper or with an app.
Debit cards can keep you from borrowing money and going into debt, but you'll need to keep enough money in your checking account to cover your expenses and avoid failed transactions or overdraft or NSF charges.
Other Fees Associated With a Debit Card
Your bank may impose additional charges for using your debit card, so it's important to carefully read the account agreement before you start using the card. When you use a debit card, you may also be charged for using the ATM of another bank, for example.
Moreover, there will often be a monthly service fee associated with maintaining the checking account linked to your debit card. Some banks even limit the number or dollar amount of debit transactions you can carry out during a certain period. If your bank charges numerous or exorbitant fees, consider switching banks, or at the very least, account types, especially if you're limited to a low number of debit card transactions each month.
Debit Card Precautions
You'll need to take certain steps to safeguard your card to ensure that neither it nor the information associated with your checking account is stolen.
If your card is physically stolen, call the bank immediately; under federal law, you can't be held liable for any unauthorized charges that hit your account after you contact your bank.
If you observe unauthorized charges before you have a chance to call your bank, your maximum liability is $50 if you report the charges to your bank within two days after you learned about them or up to $500 if you report the activity within 60 days from the time you receive your account statement. If you wait longer than 60 days, you're liable for up to the full amount of the unauthorized charges.
Criminals could also hack a website where your debit card information was stored, steal your card information, and use it to make purchases online. Your bank may have sent you a new debit card at some point because there was a data breach at a merchant. If you notice unauthorized transactions in your account, call the bank immediately to cancel the card and prevent new charges.
Another way that criminals can get your card information is through card skimming. This occurs when a fraudster either swipes your debit card through a card reader themselves (this happens at restaurants or other places where they take your card from you momentarily) or attaches a skimmer, or illegal card reader, to a machine where you use your card (like an ATM, vending machine, or gas station pump). Skimmers are small and discreet, making them difficult to spot. However, if a machine looks different from others nearby, especially the payment terminal, alert the merchant and use a different machine.
It's important to monitor your checking account regularly and watch out for unauthorized transactions; the sooner you spot the problem, the easier it will be to resolve and get back to your usual spending routine.
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