How Does a Debit Card Work?

How Does a Debit Card Work?
••• Medioimages/Photodisc/Photodisc/Getty Images

The main types of debit cards are prepaid cards and debit cards linked to a bank or credit union account. You must load money onto a prepaid card before making a purchase. In contrast, a bank account debit card takes the money you spend directly from your account. Both types of cards allow you to make purchases without carrying cash, but they function differently and have different pros and cons.

Prepaid Debit Card Basics

Prepaid debit cards come with various logos, such as Visa or MasterCard, and they're available for purchase online and at banks and retail outlets. The cards come with a personal identification number, or PIN. You must activate cards purchased online according to the issuer's instructions.

Use these cards to make purchases online, by phone and in stores, anywhere you see the card's logo. You also can use them with a PIN to get cash from an automated teller machine. Add more money to prepaid cards at reloading stations, banks and retail outlets.

The Federal Trade Commission warns consumers to never share their PIN with anyone. They suggest taking the time to memorize the PIN verses writing it down and storing it in a wallet. If the wallet were stolen, the thief would have access to the PIN, as well as the ability to use the PIN to wipe out your bank account.

Prepaid Card Advantages and Disadvantages

You don't need a bank account to buy prepaid cards, all you need is money. The main advantage of prepaid cards is budget control; You can't spend more than you load on the card.

One disadvantage is that in cases of fraud or loss, prepaid cards don't offer as much protection as a regular debit card. If you lose the prepaid card, you could be out the money. In addition, many prepaid cards carry fees for inquiries, ATM use or reloading.

Types of Account Debit Cards

Bank or credit union debit cards can be linked to a checking or savings account when you open it. Some cards display a MasterCard or Visa insignia and require a signature to make a purchase, while other cards don't show those brands and require a PIN. Some banks build both functions into a single card.

If you use a PIN, your money comes out of the account immediately. If you use a signature, it typically takes two to three days.

Using a Bank Account Card

To purchase goods in a store with a bank account card, tell the clerk "credit" if you wish to sign or "debit" to use a PIN. Swipe your card in a card reader, and sign the receipt or enter the PIN. Many stores also allow cash back with a PIN purchase, or you can use your card and PIN to get cash at an ATM. You can also make online purchases with a debit card and PIN.

Account Card Pros and Cons

With bank account cards, you're not borrowing money, so there's no bill and no interest. Some cards pay rewards, points or other incentives for using them. And if your card is stolen, your maximum loss is $50 if you report the problem within two days, or $500 if you report it later.

On the downside, the protections for debit card use online aren't as good as for credit cards, and a thief could empty your account. Fidelity suggests placing a temporary block on any misplaced cards, which will prevent unauthorized users from accessing your account. Another disadvantage is that if your bank balance is low, a store might refuse your card. Overdraft protection is available, but the fees are high.