Takeaways
- Debit cards are payment cards that pull money from your checking account.
- Debit card purchases require a personal identification number (PIN) to access funds.
- Debit cards can be used to access funds at ATMs and your bank’s branch location.
- Debit cards can come with transaction fees, foreign exchange fees, and overdraft fees.
- Compared to credit cards, debit cards have limited rewards and liability protection programs.
What is a Debit Card?
A debit card is a plastic payment card issued by your bank to make secure payments. You can use a debit card both online and offline. Your debit card is linked directly to your bank’s checking account. When you pay using the card, you use money from your checking account to facilitate the transaction. You are not using a line of credit to purchase like you do with a credit card.
These days, most debit cards have a magnetic stripe and NFC chip that contains encrypted versions of your account information. The NFC chip facilitates contactless payments or tap-to-pay features that let you make purchases by simply holding your card near a debit or credit card reader.
The front of your debit card typically displays your name, card number, and expiration date. The back of the card houses your signature and security code. Recently, however, there has been a shift to move all information to the rear of the card, with many cards now showing a standard or even customizable design on the front.
When purchasing with a debit card, you can use one of the several options available for payment. These include:
- Swiping the debit card magnetic stripe
- Inserting the debit card into a chip reader
- Tapping the debit card to a contactless reader
For most purchases, you must enter your personal identification number (PIN) to authorize and complete the transaction. While this may not be required for all payments, it is for every transaction at an ATM. Providing your PIN is a security feature that all debit cards have (even prepaid cards), which helps prevent fraud and theft.
You can also use a debit card to support mobile payment platforms like Apple Pay or Google Wallet. These services allow you to use your phone to make payments. Additionally, you can link your card to mobile money transfer applications (e.g., Venmo and Cash App).
Who Issues Debit Cards?
Debit cards are issued by banks, credit unions, and lending institutions. Debit cards have exploded in popularity because of their convenience and easy access to your checking account. You can swipe your debit card to pay for goods and services instead of carrying a stash of cash. They are accepted virtually everywhere, including small shops, individual merchants, and online websites like Amazon.
Debit cards are one of the most versatile payment tools for daily use. You can also link your debit card to your budgeting app to easily keep track of your purchases. If you are spending too much money, you can link them to tools like BillTrim that help determine what expense to cut.
Debit cards also enable simple tracking of your spending because all transactions instantly show up in your bank’s system. You can check your online checking account to keep track of your spending.
How a Debit Card Works
When you use a debit card to complete a purchase or withdraw cash, the process involves several steps and different parties on the payment network. Here’s a behind-the-scenes look at how a debit card transaction works:
- Transaction Initiation: This is when you swipe, insert, or tap your card to pay for payment at a merchant’s terminal or website. The payment portal processes your information and sends it to the merchant’s bank.
- Authorization Request: Once received, the merchant’s bank forwards your information to a payment processor that checks the information against your bank’s details. The transaction total is then validated against your account balance and potential security protocols, like fraud detection measures.
- Approval or Denial: If your checking account has enough funds to make the purchase (and there are no additional security concerns) the bank will approve the transaction. However, if you have insufficient funds, the transaction is denied. The approval or denial decision is communicated to the payment processor and the merchant’s terminal. Some debit cards will allow you to pull funds from your savings account to pay for something if your checking account has insufficient funds.
- Completion of Transaction: For approved transactions, the merchant completes the sale, and your bank places a hold on the purchase amount in your account and reduces your “available balance” by the transaction total. While you cannot access the funds anymore, they have not yet been sent to the merchant.
- Settlement: At the end of each business day, the merchant submits a batch of approved transactions to the bank, which is sent to every cardholder’s bank for settlement.
- Funds Transfer: Once the transactions are settled, the funds are transferred from your bank to the merchant’s account. Any transactions previously listed as “pending” should now show as “settled” or “completed.”
- Record Keeping: The transaction is then recorded with your bank and the merchant. You can review these transactions at any point by accessing your bank’s portal or your personal account statement.
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5 Common Debit Card Fees
While debit cards are incredibly convenient, some banks charge various fees to use them. These fees will vary from bank to bank and account type. Understanding fees associated with debit cards will help you manage your finances. Here are five debit card fees:
ATM Withdrawal Fees
You might have to deal with ATM fees if you bank with a regional bank or a smaller credit union. ATM withdrawal fees occur when you use your debit card to get cash at an ATM outside of your bank’s network. ATM fees are imposed by your bank as well as the ATM owner. These fees can be avoided by checking your banking app or website for an ATM locator, which will find the nearest in-network ATM to your location.
Foreign Transaction Fees
Foreign transaction fees are charged when you use your debit card outside your home country. These fees can be significant and typically are a percentage of the total transaction amount. The purpose is to help offset the cost of currency conversion.
Overdraft Fees
The most well-known fees are perhaps the overdraft fees [1]. These are the fees imposed if your bank decides to approve a transaction for more than your available balance, putting your account negative. Some banks will offer "overdraft protection" services, which means approving the transaction and not charging overdraft fees.
Maintenance Fees
Monthly maintenance fees are another fee many people don't consider. Many checking accounts offer debit cards with monthly maintenance fees. However, in many cases, these fees are waived if you need minimum requirements. Minimum requirements include specific amounts of card activity, certain account balances, or other requirements.
Replacement Fees
While less common, many banks may still charge a replacement card fee for cards that are reported lost. Many banks, however, will not charge for a replacement card, and federal law limits how much can be charged under certain circumstances [2].
Advantages of Debit Cards
Debit cards come with a list of benefits that make them the perfect choice for daily transactions. Here are some of the leading benefits:
- Direct Access to Bank Funds: Direct access to account funds makes managing funds easier.
- Ease of Use: With debit cards being accepted worldwide, they are a convenient form of payment for nearly anything.
- Lower Fees Compared to Credit Cards: With lower annual fees compared to credit cards, they can be more accessible than credit cards.
- Safety and Security: Modern debit cards have substantial security features to reduce the risk of fraud.
- No Interest Charges: You are not charged interest on your purchases because you use your money with a debit card.
- Helps with Budgeting: Since each transaction is immediately and automatically recorded, it is easier to track spending.
Disadvantages of Debit Cards
Debit cards can be incredibly advantageous to use. However, they do have their downsides and tradeoffs. For example, if you are trying to increase your credit score or rebuild your credit, using a credit card might be a better option. Here are several disadvantages to debit cards:
- Limited Fraud Protection: Debit cards offer limited fraud protection compared to credit cards.
- Overdraft Fees: Opting for overdraft protection can lead to substantial fees.
- No Credit Building: Debit cards do not use credit, so they cannot influence your credit score.
- Spending Limits: Many banks impose daily spending limits and withdrawal limits, which can be inconvenient for emergencies or large purchases.
Debit Cards vs. Credit Cards
Even though credit and debit cards may look and function similarly, they have four significant differences that make them distinct.
Source of Funds
The first big difference is the source of the funds. With a debit card, you spend money from your checking account. With a credit card, however, you use a line of credit from your bank or credit card provider. This means that you must pay back these borrowed funds with interest.
Impact on Your Credit
Another difference is the impact on your credit score. Debit card use is not factored into your credit score because you are not using credit. However, using a credit card does count toward improving your credit score. Your credit card balance, credit utilization, and credit limit all factor into your credit score.
Fraud Protection
Credit cards often offer robust fraud protection and limited liability for unauthorized transactions. While there are still fraud protection measures on debit cards, they also tend to have a slower resolution process, and the impact on available funds can be significant.
Rewards Programs
Finally, there are credit card rewards programs to consider. Credit card rewards programs offer you the opportunity to earn points, travel miles, or cash back on eligible purchases. These programs allow you to accrue benefits that can reduce the cost of travel or add cash back into your account. Debit cards generally do not offer these types of programs.
Smart Summary
Debit cards are one of the most used forms of payment in the U.S. economy. Debit cards can help improve your budgeting, control your spending, and put guardrails on using cash instead of credit. Overall, setting up a debit card takes only a matter of minutes. Check out how to apply for the best types of debit cards.
(1) Consumer Financial Protection Bureau. CFPB Proposes Rule to Close Bank Overdraft Loophole that Costs Americans Billions Each Year in Junk Fees. Last Accessed March 17, 2024
(2) Federal Trade Commission. Lost or Stolen Credit, ATM, and Debt Cards. Last Accessed March 17, 2024
