While you may think of debit cards and credit cards as interchangeable when making a purchase, they act quite different behind the scenes. When you pay for products and services at a merchant point-of-sale using credit cards, that money is charged to a line of credit that you are responsible for paying off later. Debit cards, on the other hand, draw money directly from your bank account (either a checking account or savings account) when you make a transaction. A hold is placed on your account in the amount of the transaction, preventing you from spending it elsewhere, and the details are then sent to your bank within one to three business days. You don’t build credit when you use your debit card to make purchases as you’re using your own money from your own account, not borrowing money from a line of credit.
Debit Cards at a Glance
Debit cards are a convenient payment method that often only require a personal identification number (PIN) to complete a sale instead of writing out your information each time like you would with paper checks. Financial institutions give you the ability to choose this PIN when your debit card is issued. Do not share this number with anyone and report if your card is lost or stolen immediately, as it could lead to identity theft and unauthorized card transactions. There are numerous online banking services available to help you manage your debit card use, either directly from your bank or through a third-party company. Many people use apps on their smartphone or tablet to conveniently track their debit card balance. These apps are also useful for reducing the damage caused by identity theft, as they commonly have features that can alert you if suspicious spending activity is detected.
Not all banks require a credit check when you open an account and get your debit card. Some instead refer to credit reporting systems that provide a record of your checking account activity. These verification services give banks insight into your history of overdraft charges, account freezes, ID theft alerts, and even how often you order physical checks.
There are numerous fees associated with using debit cards. Banks or credit unions may charge a monthly fee, such as a maintenance fee, simply for having your account open. You will also encounter costly overdraft fees if you attempt to charge more on your debit card than the available balance, as well as a fee for using an ATM not affiliated with your bank to withdraw cash. As you would with a credit card, read the card’s terms and conditions so that you’re aware of the fees that may come your way.
What to Look for in a Debit Card
Aside from the registered trademarks of your issuing bank and card brand printed on the front, there are a handful of major things to look out for when you get a debit card of your own.
Intuitive Online Monitoring and Management App: Debit cards, unlike credit cards, are tied directly to your bank account balance. Because of that, you should find a program or application that can help you easily keep track your current balance at all times. Many banks have their own free apps available to download that serve this function, as do separate third-party companies.
Identity Theft Protection: Even if you are familiar with the banking apps associated with your debit card, it’s worth making the distinct point to enable the security features that notify you of any odd spending activity. Some of these programs can send messages directly to your smartphone in addition to your email inbox in real-time, which can be key in spotting ID theft before any major damage is done.
ATM Withdrawal Limits: Even nowadays, the motto “cash rules everything around me” can still apply, such as when leaving a tip at a restaurant or haggling at an outdoor craft market. Always know what your daily ATM withdrawal limit is and any fees charged for taking your cash out to avoid ending up in an embarrassing situation at the register.
Debit Cards vs Prepaid Debit Cards: It’s important to note that while they sound similar, debit cards and prepaid credit cards are not the same. A reloadable prepaid debit card is not tied to any bank account while a debit card is, though both allow you to withdraw from a sum of your own money instead of borrowing against a line of credit. If you make a purchase using your debit card and have opted into your bank’s overdraft program, you will have to pay a fee when you try and spend more than the available balance. Prepaid debit cards do not have an overdraft feature, so when you find yourself in a similar situation, your purchase will simply be declined.
What are the Limits of Using a Debit Card?
If you have poor credit and cannot qualify for the credit card with the tempting rewards that you want, you may be thinking of using a debit card to make all of your purchases. There are a few drawbacks of choosing to go with this option that you should consider.
Credit cards are powerful financial tools that can help you build your credit history when making purchases in person and online, whereas debit cards do not as you are simply using your own money. The purchasing power of a debit card is also limited by the amount of money that you have in your account, while the spending limit you are allowed on a credit card can be increased over time with responsible use.
Debit cards usually have security features to help you recover your money if they’re lost or stolen, but until the situation is resolved, you’ll still be unable to buy things or pay your bills if that’s the only way you do so. Criminals have become experts in stealing your debit card information practically everywhere, including gas stations, department stores, and especially the ATMs you use to withdraw cash from. You’re also not safe when you go out to a bar or restaurant, as the server can simply copy your card’s data when you hand it over to settle your tab. At least with a credit card, you’re able to dispute any charges you find out of the ordinary and have them removed from your balance without directly affecting the cash you have in the bank.
Debit cards are suitable for spending your own money, but ultimately fall short when it comes to establishing a credit history. Use debit cards if you must, but don’t give up on credit cards if you want to buy big-ticket items in the future, like a car or a home.