This comprehensive guide explains the ins and outs of a debit card, and how it differs from a credit card.
When you’re at the check-out counter paying for your purchase, a debit card and credit card may seem to function the same way — swipe the card and head out with your newly purchased goods in hand. However, the similarities between a debit and credit card stop there. A debit card gives you access to the funds in your checking account, and affords you the ability to make purchases without the risk of getting into debt or harming your credit. While a credit card allows you to make purchases using a line of credit, which is then charged interest.
Learn more about the differences between these two types of cards, plus the drawbacks of each. Discover mistakes you should avoid when using a debit card, and get answers to the most common questions about debit cards.
What is a debit card?
A debit card is a type of payment card that uses money from your checking account to pay for purchases. Since a debit card is linked to a checking account, it’s a great alternative to using checks or carrying cash. Debit cards with a major credit card processing logo can be used in all the same places as credit cards, including online. The funds for a debit card transaction still come from the linked checking account, even when the card is used like a credit card.
Not only can you use a debit card to make purchases, you can also use it to withdraw cash from your account by using your card at an ATM. You simply insert your card into the machine, enter your PIN, and follow the onscreen prompts for making a cash withdrawal. You can also use the debit card at an ATM to deposit checks, check your account balance, or transfer money from linked accounts.
Getting a debit card doesn’t require a credit check, which makes it more accessible than a credit card. You do need to have a checking account to be able to use a debit card. Most banks will automatically issue you a debit card when you open a checking account. If you don’t already have a debit card linked to your checking account, you can simply ask your bank for one.
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Fees to expect with a debit card
Debit cards have a potential for fees, but these fees are typically avoidable depending on how you use the card.
- ATM fees. You may have to pay a fee for ATM transactions. A cash withdrawal may be charged a $2 to $5 if you use an ATM outside your bank’s network. Your bank may charge a fee in addition to the fee you pay the ATM operator. Other ATM transactions like balance inquiry or account transfer can also incur fees.
- Card replacement fee. Your bank may charge a fee to replace your debit card at your request. This fee doesn’t apply when the bank replaces an expired debit card. There may be an additional fee to have your replacement card rushed to you.
- Foreign transaction fee. Purchases made in foreign currencies or with a foreign merchant are subject to a foreign transaction fee. You also have to pay the fee if you use your card at an ATM to withdraw funds in a foreign currency. Foreign transaction fees are a percentage of the transaction.
- Monthly account fee. Your checking account may include a monthly account maintenance fee. Check with your bank to see if you’re able to avoid this fee. Some banks allow you to avoid the monthly account maintenance fee if you use direct deposit, make a certain amount of transactions each month, or maintain a minimum average daily account balance.
- Overdraft fee. If you make a debit card purchase that exceeds your account balance, your bank may process the transaction as a convenience to you. In exchange for this courtesy, you’ll be charged an overdraft fee. You can avoid overdraft fees by opting out of having overdraft transactions processed. If you choose to opt out, your bank will decline any purchases that exceed your account balance. You can also link your checking account to a savings account to use as overdraft protection.
Debit cards vs. credit cards
Debit cards have some similarities to credit cards. Debit cards, like credit cards, have a 16-digit account number and expiration date and a 3-digit security code. However, there are some major differences between credit and debit cards that will help you decide which of these cards should be your primary card.
- Debit cards are funded by money in a checking account, while credit cards are linked to a line of credit. Your debit card purchases are deducted from your checking account balance. Each debit card purchase reduces your checking account balance and leaves you with less money for additional purchases. When you make debit card purchases, you’re not creating any debt. Your credit card, on the other hand, is linked to a credit line. Your purchases are added to a credit card balance that must be repaid.
- Debit cards do not require monthly minimum payments. Since your debit card purchases are paid from the money in your checking account, you don’t have to make any monthly payments on your debit card. You may have to maintain a minimum balance to avoid a monthly fee, but a minimum balance is not a requirement. Credit card balances do require monthly minimum payments. Failing to make the minimum required payments can result in late fees, higher interest rates, and damage to your credit.
- Debit card purchases aren’t subject to interest. Because you’re not borrowing money, there is no finance charge associated with your debit card purchases. In fact, depending on your checking account, you may actually earn interest on your checking account balance. Credit cards do charge interest on balances you carry unless a promotional rate is in effect.
- Debit card usage won’t hurt your credit. Your debit card and checking account usage is not routinely reported to the credit bureaus and is not included in your credit score. Credit card usage, on the other hand, directly impacts your credit score. Handling credit cards responsibly is important for maintaining a good credit score. There is one exception: if your debit card purchases exceed the balance in your checking account and you fail to clear up the balance, your bank may report the outstanding balance to the credit bureaus.
- You can increase your own spending limit. With a debit card you can spend as much money as you have available in your checking account. Depositing more money will allow you to spend more. With a credit card, you can only spend up to the credit limit your credit card issuer loans you. To increase your spending ability, you’ll have to wait for your credit card issuer to raise your credit limit.
- Cash withdrawals are less expensive with a debit card. When you use your debit card to withdraw money at the ATM, you face a maximum of two ATM fees: one from the ATM operator and one from your bank. When you use your credit card to withdraw cash at the ATM, not only are you subject to an ATM fee but you will also have to pay a cash advance fee and your cash advance balance may be charged a higher interest.
Drawbacks of using a debit card
While debit cards have many advantages over credit cards, there are some drawbacks.
- There is no opportunity to build your credit. Because debit card usage is not reported to the credit bureaus, responsibly handling your debit card will not help your credit score.
- There is no grace period on purchases. Whenever you use your debit card for a purchase, the money comes out of your checking account almost immediately, reducing the amount of cash you have available for other purchases. Using a credit card gives you a small grace period to delay payment for purchases. If you’re willing to pay interest on the balance, you can revolve your balance from month to month as long as you make the minimum payment each month.
- Debit cards have less fraud protection than credit cards. By law, you can be liable for up to $500 of fraudulent debit card transactions depending on when you report the fraud. (In some instances, you could be liable for all of the fraudulent transactions if you wait several months to report your lost or stolen card). With a credit card, your maximum liability is $50 depending on when you report the fraud.
- Debit card purchases don’t earn rewards. There are dozens of credit cards that offer generous rewards on purchases. With a rewards credit card, you have the opportunity to earn cash, points, or miles on your qualifying transactions. Some even have sign-up offers that pay a lump sum of rewards if you spend a certain amount in the first few months of having the credit card. A debit cards doesn’t offer the same ability to earn rewards even if you use your card for the same amount of spending.
- Car rental is more difficult with a debit card. Depending on the car rental agency’s policies you may have to pay an additional deposit when you use a debit card to rent a car. This leaves part of your checking account balance unavailable until after you’ve returned the rental car and the transaction processes completely. In addition to the deposit, you may also have to provide additional documentation to prove your identity and the rental agency may require you to go through a credit check before renting you a vehicle.
Important mistakes to avoid with debit cards
While debit cards are low-risk payment devices, there are a few critical mistakes you should avoid.
- Not watching your account balance. Keeping track of your account balance helps you avoid overdrafts. When your account balance is already negative, each subsequent transaction will be charged an additional overdraft fee. Your bank likely has a smartphone app you can download to quickly and easily check your checking account balance.
- Waiting to report a lost or stolen debit card. If your debit card is missing, report it to your bank right away rather than waiting to see if you find it. The longer you wait to report a lost or stolen debit card, the more likely it is that someone could use your debit card to make transactions on your account. Not only will you be without access to your funds, you may also be liable for some of the charges since you waited to report the missing card.
- Frequently using out-of-network ATMs. Withdrawing cash from out of network ATMs is more expensive than using your bank’s ATM, since you’ll be charged an ATM fee by both parties. Doing this several times in a month will quickly add up. Use ATMs inside your bank’s network as much as possible to minimize the amount of ATM fees you pay.
Frequently asked questions
What's the difference between using a debit card as credit or using it as debit?
At the point of sale, you can choose whether to use your debit card as credit or debit. The one you choose affects how the transaction is processed. Either way, the funds come from your checking account.
If you use the card as credit, you’ll sign for the purchase. If you use it as debit, you’ll enter your PIN to authorize the transaction. With PIN transactions, your bank account is debited immediately and you have the option of selecting cash back at the merchant if the merchant allows. When you use the card as credit and sign for the purchase, the payment is processed through the credit card network and withdrawn from your account usually within a couple of days. Using the credit option also affords you the protections of that credit card, such as anti-fraud. This varies from bank to bank, so check with your provider.
Is using a debit card better than using a credit card?
There is no simple answer to this question. A debit card is better than a credit card in some ways, while a credit card is better than a debit card in other ways. When you use a debit card, the money comes from your checking account immediately and you don’t have to worry about paying anything back. You save money on interest and other credit card fees and eliminate the risk of a late payment.
With a credit card, you have a grace period to pay back the amount of credit you’ve used. Credit cards also come with stronger fraud protection. And, depending on the credit card, you may have additional perks like extended warranty or purchase protection that can benefit with major purchases like electronics or appliances.
What happens if there is no money in my checking account?
It depends on whether you have opted out of having overdraft transactions processed. In the event that you have not opted out, your bank will process the transaction normally and charge you a fee for over-drafting your account. Your account balance will be negative in the amount of the overdraft plus the overdraft fee. If you choose to opt out, the bank will decline the transaction and you will have to choose another form of payment to complete the transaction.
What should I do if my debit card is lost or stolen?
It’s important that you report a lost or stolen debit card as soon as possible to minimize the amount of fraudulent transactions a thief could make. This is especially important since the debit card is connected to your checking account and your money. Reporting the fraud quickly also minimizes the amount that you could be liable for.