A debit card is a card-based electronic payment system that automatically withdraws money from your account when you complete a transaction. A debit card looks similar to a credit card; it’s made of plastic and is the same size as a credit card. Most places that accept credit cards also accept debit cards.
Like credit cards, most debit cards use either a magnetic stripe or an EMV chip to process transactions. EMV stands for Europay, Mastercard, and Visa, the primary issuers of debit and credit cards that use these chips.
Generally, chip cards are considered more secure because of the way they process transactions. In short, they generate a unique, encrypted virtual account number for each transaction. Even if the transaction were somehow intercepted by cyber-thieves, they couldn’t use the number acquired for unauthorized charges.
How Do Debit Cards Work?
When you swipe or insert a debit card at the point of sale, you often have two payment options. If you choose to process the purchase as “debit,” you’ll be prompted to enter your personal identification number (PIN). The money you spent gets debited, taken, immediately from your linked bank account, which is usually a checking account.
When you make a debit card purchase, you may have the option to get cash back from your bank account at the point of sale. Enter the amount you’d like, and the salesclerk pulls that money directly from the register.
If you choose to process the transaction as credit, you have to sign for the purchase. Although there are no interest fees associated with using a debit card as a credit card, it could take several business days for the transaction to clear. That means your bank account may show you have funds available that you have already spent.
Additionally, when you use your debit card as a credit card, you can’t get cash back, and the merchant may pay additional transaction fees, which may be passed on to you as the customer.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 put a cap of 21 cents plus 0.05 percent of the purchase price on debit card purchases. Credit card fees can range from 1.5 percent to 2.9 percent for swiped (or EMV chip) purchases and up to 3.5 percent for hand-keyed transactions. If you live in a state where merchants can add those fees onto the customer’s bill, you can save money by opting to pay using your debit card and entering your PIN.
In addition to using your debit card in brick-and-mortar stores, you can use your debit card for online purchases. Simply enter the number on the card, as well as the CVV, a three- or four-digit number on the back of the card, to process the transaction. CVV stands for Card Verification Value. It is one way to protect against fraudulent charges by ensuring the purchaser has the actual debit card in their hand and hasn’t stolen the number from the cardholder.
Read More: How Does a Debit Card Work?
Why Should You Have a Debit Card?
As noted above, using a debit card at the point of sale can save you from additional fees associated with credit card purchases.
If you are inclined to spend more than you make in any given month, a debit card can help keep you on track with your budget. If you try to use your debit card without the money to cover your purchase in your checking account, the bank declines your purchase or charges overdraft fees. If your checking account goes into overdraft, you will probably receive an alert via email or text. This warning can help you control your spending.
Debit cards also offer the convenience of withdrawing cash without a visit to the bank or ATM machine.
Finally, debit cards provide an easy way to access the funds in your bank account without having to write checks or carry cash. You have a record of all your transactions on your bank statement, or you can log into your online banking portal to track your spending.
Read More: Check Card vs. Debit Card
Types of Debit Cards
Depending on the type of debit card, you can also use the card to withdraw funds from your bank account at an ATM machine. That’s why some people call debit cards “ATM cards.”
Be cautious when using ATM machines. If the ATM machine isn’t owned by your bank, you could pay hefty fees of up to $4 per transaction or more to access your money. Additionally, your bank could charge you additional fees for using an ATM outside of their network.
In addition to debit cards that double as ATM cards, there are other types of debit cards you should understand.
Prepaid Debit Cards
Often called “prepaid cards,” prepaid debit cards are similar to debit cards and are processed the same way at the point of sale. The main difference is that money from debit cards comes directly from your bank account.
With prepaid debit cards, you can load a balance onto the card in a variety of ways:
- Add funds to the card when you first purchase it using cash or a debit card
- Buy a reload pack to add money to a card
- Transfer money from your checking account
- Add funds online
- Add funds in cash at a financial institution or retail location that sells the card
- Arrange to be paid through direct deposit onto the card
Some prepaid cards even let you withdraw money from an ATM and use them the same way you’d use a debit card or credit card. Keep in mind, funds on a prepaid debit card may not be FDIC-insured, and you may not be protected against fraudulent charges.
Most prepaid cards have fees attached to carrying them or using them. Read the fine print to make the right choice to fit your needs and budget.
Rebate Debit Cards
Companies used to send rebates related to product purchases via check. But, if you're due to receive a rebate for a purchase today, it will most likely come in the form of a debit card. Cable TV and internet providers, as well as cell phone service providers, often issue substantial rebates in the form of debit cards.
Most rebate debit cards cannot be processed as credit at the point of sale. You need to create a pin the first time you use the card and use that number for all your debit card transactions using that card.
Benefits Debit Cards
Benefits debit cards are similar to rebate debit cards. Unemployment, state disability insurance, and other employee benefits programs often issue debit cards as a way for beneficiaries to access their funds.
How to Get a Debit Card
When you open a bank account, the bank usually issues a debit card for free. You may have choices in the design, just as with bank-issued checks. You set up your PIN at the bank or choose a PIN and activate the card the first time you use it at an ATM. If you lose your debit card, you should contact your bank immediately to put a stop on the card and issue a new one, with a unique account number.
You can buy prepaid cards at many retail locations. PayPal also issues debit cards, allowing you to tap into funds in your PayPal account without using the app.
Do You Need a Debit Card?
Understanding the differences between credit cards and the many types of debit cards can help you choose the best card for your needs. If you have a bank account, carrying a debit card offers easy access to your money for online purchases, point-of-sale transactions, and ATM transactions.
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Dawn Allcot is a full-time freelance writer, content strategist, and founder of GeekTravelGuide.net, a travel, technology, and entertainment website. A seasoned finance writer, her work has appeared on Forbes, Bankrate, Lending Tree, Solvable, Moneycrashers, and many other personal finance sites, including the award-winning Chase News & Stories portal. With more than 20 years editorial experience, Dawn seeks to take complex concepts and simplify them for today's busy readers. Whether she is writing about taxes or technology, her goal is always to educate, inform, and entertain.