A debit card looks like a credit card. It allows users to make payments directly from their bank accounts using credit card networks instead of paper checks.
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.
Definition and Example of a Debit Card
A debit card is like an ATM card with the functionality of a credit card. The notable difference is that when you buy something with a debit card, the money comes directly from your checking account.
Your bank may issue you a debit card or credit card, but these plastic payment options don't function the same way. The major difference is that a debit card is a type of bank card that is linked to your checking account.
- Alternate name: Bank card
You can use a debit card to withdraw cash at ATMs or make purchases at the brick-and-mortar and online stores where credit cards are accepted, all without having to write a check or carry cash. One of the benefits of a debit card is being able to use it for transactions that typically require credit cards. Examples include online purchases, car rentals, and hotel and airline reservations, among other things.
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 where credit cards are accepted. The biggest advantage over credit cards is that you're not borrowing money as you are when you use a credit card, which can help keep you out of debt.
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. 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.
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.
It's possible to overdraw your account if you opt for overdraft protection. Doing so will incur an overdraft fee, typically around $35. What this means is that you can successfully make a purchase even if you do not have the funds in your account to cover the expense. The overdraft fee is what the bank charges for allowing your balance to drop to less than zero.
Maintaining a running balance on your checking account can help reduce the likelihood of incurring overdraft charges.
Opting out of overdraft protection means your card will be declined if you attempt to make a purchase when you do not have sufficient funds. In that case, you will not have to pay an overdraft fee.
Alternatives to Debit Cards
Paying with cash or writing checks may be preferable for some people, and checks are drawing money from the same checking account as a debit card.
When you need to pay with plastic, there are benefits to using a credit card instead of a debit card. If used responsibly and if you pay off balances every month, it can help build credit.
Fraud protection for credit cards also is typically stronger than it is for debit cards. If your card is physically stolen, call the bank immediately. Whether you have a debit card or a credit card, you can't be held liable for any unauthorized charges that hit your account after you contact your bank. Beyond that, protections favor credit cards. The most you are liable for with a credit card is $50, but for debit cards, that liability can increase to as much as $500 if it takes more than two days before you are able to report the fraud. Your liability with credit cards is $0 if only the numbers were stolen and you still have the card.
Additionally, a stolen debit card often is more inconvenient even if you are not liable for the charges. Money is debited directly from your checking account, and it takes time before it is refunded. With a credit card, however, you don't lose access to any of your own cash—only the use of your card until you are issued a new one.
Debit Card vs. Credit Card
|Debit Card||Credit Card|
|Using does not increase debt||A credit line helps with unexpected expenses but can increase debt|
|Can be used where credit cards are necessary, but using will not help your credit score||Responsible use can help improve credit scores|
|Fraud liability is limited to $50 if reported within two days||A cardholder is not responsible for fraudulent purchases if only the numbers (and not the card) were stolen|
- Debit cards function similarly to credit cards.
- Funds are debited directly from a bank account.
- Overdraft protection allows transactions to process even if you don't have the funds to cover them, but you'll be charged an overdraft fee.
- Liability for charges on lost or stolen cards can be limited to $50 if reported soon enough.
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."