Debit Card | Definition

Debit cards, also called check cards, offer the convenience of credit cards and many of the same consumer protections when issued by major payment processors like Visa or MasterCard.

There are so many cards out there it can be hard to keep track. Debit cards are different than credit cards, but they look the same. What is a debit card? How does it work? What are the benefits and drawbacks of a debit card?

A debit card is a digital checkbook. It allows you to access funds in your account to make purchases at a business and withdraw cash from your associated bank account. It is usually a small plastic or metal rectangle containing your account information.

Opening a Bank Account and Getting a Debit Card

A debit card is a portal to access your bank or credit union checking account. Whenever you open a new checking account, you will be offered a debit card to go along with that account to give you access. Since a checking account isn’t a loan, there is no credit check. However, when opening a bank account, there is a bankability check through ChexSystem, so you need to qualify for a bank account to get a debit card.

A wide variety of accounts come with debit cards, so most people have access to debit cards even if they don’t have access to credit cards, but there are still some hoops to jump through to qualify for a card.

Recommended Read: Can My Debit Card Usage Affect My Credit Score?

Whose Money is Being Used?

Since a debit card is like an electronic check, it is a way to transfer funds from your account to the account of the business you are purchasing at. Since it is just facilitating a transfer, all the money used to make a purchase is your own.

If you don’t have the funds available in your account to make that purchase, one of two things happens. Either your card gets declined, and the purchase will not go through, or the bank will advance you the funds to make the purchase. In this case, you will have a negative balance on your account, which you need to pay back quickly. When your account is negative, it is called an overdraft balance. There might also be fees associated with having your account balance overdrawn, so be careful.

Recommended Read: What is a Bank Statement?

Who is Involved in a Debit Card Transaction?

There are four groups involved in a debit card purchase. First, you are involved once you decide to purchase an item or service. Second, the business you are buying from is involved. Every time you purchase with a debit card, the merchant is charged a small processing fee.

This processing fee comes from the third group, the financial services company or card company such as VISA, Mastercard, and American Express. These companies aren’t holding your money, they are simply the middleman making sure everything runs smoothly. Once you swipe, they check with the fourth group, the bank. The bank lets them know whether you have funds available for the purchase. If you don’t have the funds, the bank will either decline the purchase or advance the funds, depending on the account.

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Benefits

Debit Cards are beneficial for several reasons:

• You don’t have to carry cash on you.
• You can cancel a stolen card.
• It is harder to go into debt using a debit card.
• There is no interest on debt card transactions.
• You can’t ruin your credit score with a debit card.

Drawbacks

Debit cards are detrimental for several reasons:

• Fraudulent purchases are harder to recover.
• You don’t build your credit score using them.
• Debit card rewards, if any, are minor compared to credit card rewards.

Debit Card Tips

• Track your spending, so you don’t overuse your card and get an overdraft fee.
• You need a Personal Identification Number (PIN) to make transactions, so it is essential to remember your PIN but don’t write it on the card.

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