How Does a Debit Card Work?
On appearances alone, you might assume that a debit card is just like a credit card—with a different name and minor differences in features. But using a debit card as a credit card in stores doesn't mean the payments are processed in the same way.
While credit card purchases are charged to an account that represents how much you're able to "borrow" from your purchases—with the expectation that you'll pay down this debt in the future—a debit card's charges are directly applied to your checking account. When you pay for a $25 item in a store, that amount is automatically deducted from your checking account balance.
Advantages of a Debit Card
Debit cards are one of the most commonly used financial products available to consumers. Here are some of the top benefits that come with owning and using a debit card:
- You can't overspend: One of the most common questions about debit cards is, "Can you go into debt with a debit card?" The answer is no: While a credit card makes it easy to spend beyond your means, debit card charges are only approved when there are sufficient funds in your bank account to cover that purchase.
- They're more secure: Because debit cards require a PIN for both ATM withdrawals and debit card purchases, they offer additional security than a traditional credit card.
- You can use them for ATM withdrawals: Credit cards sometimes allow cash withdrawals, but they come at a high cost and should be reserved for emergency situations. Debit cards can be used as an ATM card to withdraw cash straight from your checking account. If you withdraw cash from an ATM location within your network, you can typically withdraw this cash free of charge.
- They typically have no annual fees: Some credit cards charge an annual fee in exchange for access to various services and rewards. Debit cards are typically available free of charge, offering a lower-cost secure payment option.
- Debit cards don't require a credit check: While credit card approvals are subject to a credit check, debit cards are automatically available when you open a checking account. If you have a limited credit history or a low credit score, a debit card may be available to you even if credit cards aren't an option.
- You can develop money management skills in a relatively safe environment: While you can't build credit history with a debit card, since debit card activity isn't reported to credit bureaus, debit cards can help you indirectly improve your credit over time. If you use debit cards to pay your bills on time, avoid debt utilization, and keep your checking account open longer, then debit cards can be a valuable tool in managing your money and following the best practices of building strong credit.
Disadvantages of a Debit Card
While the overall benefits of debit cards offer broad appeal to many credit union members, there are also disadvantages that accountholders need to be mindful of. These include:
- You can't charge purchases with a promise to pay later: One of the benefits of credit cards is that you can make charges now with a plan to pay off the balance later. This can be helpful when you're faced with unexpected costs, such as travel or medical expenses, or essential car repairs. Credit cards offer flexibility to help you afford these purchases in the moment—but with a debit card, you can only cover those charges if the funds are in your bank account.
- Large purchases can be a hassle: Some debit cards have spending limits that can complicate efforts to make large purchases. If you want to purchase a $500 piece of furniture but only have a $300 daily charge limit, you will need your debit card issuer to lift this restriction to clear your purchase. This may involve making a call to your credit union to have the charge authorized.
- If you forget your PIN, you could be in trouble: Because your debit card's PIN number is required for ATM withdrawals and charged purchases, the loss of your PIN could render your card unusable. Depending on the recovery process for your PIN, it could take days to be recovered, or for a new PIN number to be assigned to your account.
- If you overspend, you could get hit with costly overdraft fees: If charges to your debit card cause your checking account balance to go negative, you could suffer overdraft fees and other steep charges that far exceed the potential costs of using a credit card. One option to prevent over drafting is to sign up for overdraft protection through your credit union
Even if you have access to the flexible purchasing power of a credit card, the cash access, security features and fee-free terms of a debit card make this an important financial product to carry with you throughout your life.