The Basics of Debit Cards


For many years, people have used cash to purchase things.  But now, there are several options available to an ordinary consumer to complete his payment.  One of them goes by the street term ‘plastic’ – which refers to a card that people for their transactions use most of the time.  The financial world offers various types of cards to consumers:  debit cards, ATM cards, and credit cards. You should be able to choose the correct card for your financial needs if you understand the differences between them.

A debit card is a bank card that you link to your checking account.  You can use it practically anywhere – in all stores and establishments that accept credit cards.  You can use it to pay for your transactions using your money in the bank onsite at different merchants throughout town.  You can also use your debit card to access your account through an ATM.

When you use it, the bank will take the money directly out of your checking account.

 Usually, one of the major credit card companies power these debit cards.  This is why they will usually have either a Mastercard or a Visa logo on its face in addition to your bank’s name and logo.  The bank will give you a PIN so you can use it at a store or ATM.

How a Debit Card Works

Whenever you swipe or tap your debit card, the merchant technically places a hold on your bank account for the amount of your transaction.  Your bank would be able to provide you with the information on pending transactions on your account.  These pending transactions are actually the holds put in effect by the merchants.

The merchants will complete the transaction by submitting the details and then the bank takes the money from your account and transfers it to the merchant.  These details will show up in your cleared transactions.  Some merchants may take longer to complete the process and you will have a transaction listed as pending for a few days.

If you will use your debit card in a hotel or a car rental, do not be surprised if you notice a bigger hold than the amount of your transaction.  This is normal practice by the merchant as their security in case you accrue additional costs later.

Sounds simple enough. But you should keep this in mind because you can run into a situation where a merchant may decline your card because of the outstanding hold. A good piece of advice?  Carry extra cash if you are going to use your debit card for a hotel or car rental.

What makes a debit card different from a credit card?

Debit cards primarily function to let you pay for goods in shops and withdraw money from your account through cash machines.  The bank takes the money automatically from your current account when you spend it so you must have enough money in your account or an overdraft arrangement with your bank to cover the transaction.

On the other hand, your bank will not link your credit card directly to your current account but merely extends a credit facility to you.  With your pre-arranged limit, you can purchase things immediately and pay them at a later date.  They add the cost of your purchases to your credit card account and gives you a statement every month.

You will then have the option to pay your bill in full within a deadline and not pay any interest.  You may also just pay a minimum amount and spread the remaining balance over a period of time.

Of course, the bank will charge you an interest if you do this so the quicker you pay off your balance, the less interest you’ll be paying.

How do I Know Where I Used my Debit Card?

As soon as you activate your debit card, your bank or credit union will be sending you a monthly statement of account.  It will show the following:

  • Where you used your debit card and how much you spent
  • Which ATM you used, how much you withdrew, and what fees you paid
  • Who you wrote a check to and for how much

This statement is useful in tracking your spending and creating a budget.

Fees Associated with a Debit Card

When you use your debit card at an ATM to get cash, you may be liable to pay for ATM fees. Your own bank may have standard fees associated with your debit card so you should read the rules around using the debit card.

For example, you might have to pay a monthly service fee for just having a debit card.  Some banks may set a monthly limit for ‘free’ transactions where you won’t pay a service fee.  As debit cards increase in popularity among consumers, the fees and restriction are becoming less common.  Should your card have exorbitant fees or a very low transaction limit each month, you can easily switch to a different account type or if necessary, to a different bank.

What is a PIN and Why is it Important?

A PIN is a security feature to prevent unauthorized use of your debit card.

The letters P.I.N. stand for a personal identification number.  This is but one of the ways the bank tries to stop dishonest people from using your debit card and wiping out all your money in your account.

A PIN is personal so never share it with anyone.  And please, remember it, do not forget it.  Do not write your Pin on your card or keep it in your wallet.  Do not use easy-to-crack numbers such as your birthday or easy combinations such as 1111.

Debit Card Fraud

Taking care of your debit card means making sure that you do not lose it or let anybody steal the card or the information on it.

If your card is physically stolen or lost, you should call the bank immediately and ask them to cancel the card.  Criminals might steal your card information and use it to buy things online on your account.  In some cases, your bank may have sent you a new debit card because there was a data breach somewhere and the card fell into the wrong hands.  If you discover unauthorized transactions on your statement, report it to the bank immediately so they can trace exactly what happened.

How to Protect Your Debit Card

Here are some ways you can protect your debit card and your account:

  • Keep your debit card number and PIN private and confidential
  • Avoid using your debit card to buy things online
  • If you lose your debit card, report it to your bank or credit union immediately. Ask them to cancel the lost card and send a replacement card to you.
  • Ask your bank to send you account alerts by email or SMS. This way, you will know if somebody is taking money out of your bank account.

What happens if I use all the money in my bank account?

Let’s say you don’t have enough money in your checking account – how will this affect your debit card?  It’s a no-brainer:  merchants will decline your card!  You will not be able to purchase anything with it.

You can sign up with some banks and credit unions for ‘’overdraft protection” when they have it.  This facility will let you use your debit card to buy items even when you do not have enough money in your account.  The catch is, you will have to pay a fee to the bank.  Some banks might even charge this fee for every transaction until you deposit enough money in your account to cover the things you are buying.

Prepaid Cards vs. Debit Cards

At first glance, the two might appear the same but prepaid cards and debit cards have a handful of difference.  A debit card has a corresponding checking account it is linked to.  A prepaid card has no bank account that it associates to.  Instead, you have to pre-load it with an amount that you intend to use or spend.

Obviously, with a prepaid card, you won’t be able to spend more than the actual amount you have loaded into the card.  With a checking account, it is possible to have some form of overspending.  So, if your debit card comes with an overdraft protection agreement, you may overspend with your debit card.  In many cases, if your purchase or ATM withdrawal with your debit card exceeds the amount in your account, the bank will charge you a fee.  At some point, the bank will also require you to fund the overdraft.

Currently, prepaid cards do not enjoy all the consumer protections enjoyed by debit cards.  Debit cards have some form of protection against lost cards, stolen cards, or unauthorized charges.

However, the Consumer Financial Protection Bureau (CFPB) has issued a directive that requires all prepaid card issuers to offer these protections.

Advantages of a Debit Card

Take a look:  these are the advantages of paying with a debit card instead of using cash, check or a credit card:

More Convenient

Your card is all you need.  You don’t have to carry so much cash, or your checkbook and pen (and go through the motion of writing, signing, and recording), or remember to make a credit card payment after a month.

Faster

Merchants can process a debit card transaction quicker and with less scrutiny than checks or credit cards. You pay the exact amount each time so you lose no time in making a change.  Plus, swiping the card is many times faster than writing out a check.

Helps you Stick to Your Budget

When you use a debit card, it forces you to spend only up to the amount of money in the associated account.  This will prevent you from racking up debt or having to pay interest and those irritating late fees from a credit card company.

Money hack:  opting away from overdraft protection will ensure that you won’t overspend and avoid costly fees.

 Easier To Get Than Credit Cards

Many banks will give you the option to link your checking or savings account to a debit card just by checking some boxes on a form.  There’s no need to go through the tedious process of filling a lengthy application and waiting for the bank’s approval process to finish.

You can easily withdraw cash.  Here are two ways to do it:  opt for a “cash back” offer at most stores or use your debit card as an ATM card at cash machines.

Disadvantages of a Debit Card

On the opposite side, there are also ‘cons’ in using a debit card.  Here are some of them:

Disputed Charges can be More Difficult to Settle

When you make a purchase, the money is spent out of your account at the moment of purchase.  Being so, you have more risk with a debit card than with a credit card if the item is defective, misrepresented, or never reaches your address.

Extra Fees

When you avail of a debit card facility, you open yourself to a lot of prospective charges.  The bank may charge a monthly service fee, over-limit fees, transaction costs, or penalties for not maintaining the required minimum balance on your account that result from using the debit card.

No Grace Period

For a debit card transaction, the bank gets the funds directly from your checking account.  On the other hand, a credit card allows you to borrow funds on credit and leaves your money in your bank account intact for the moment.

Therefore, a debit card holder ‘pays’ for his transactions immediately and does not enjoy the benefit of paying at a later date.

Won’t Improve Your Credit Score

A good credit score is one of the best financial goals you could ever set for your future.  Paying bills, such as credit card billings, on or before their due date is the most effective way to increase your rating or maintain a high score.

Unfortunately, your debit card transactions do not affect this at all.

Can’t get Reward Points

Practically all credit cards come with a rewards program in one form or another.  Some offer travel reward points or airline miles when you make large purchases through your card.  There are many kinds of rewards and incentives out there as there are many types of credit cards.

In fact, we have devoted an entire episode just for it.  Sadly, these programs have not yet infiltrated the arena of debit cards.

Lower Level of Fraud Protection

Supposing a thief steals your card and manages to get your Personal Identification Number, you could lose all the money in your bank account. Fraud can happen anywhere and credit cards are likewise prone to it.  However, banks have more safety controls in place for credit cards to prevent fraud than with debit cards.