What Exactly Is a Debit Card?
A debit card is a payment card that deducts money directly from a consumer’s checking account rather than borrowing money from a bank. When issued by major payment processors such as Visa or Mastercard, debit cards provide the convenience of credit cards and many of the same consumer safeguards.
There are two varieties of debit cards that do not require a checking or savings account and one regular type.
- Standard debit cards deduct funds from your bank account.
- State and federal agencies distribute electronic benefits transfer (EBT) cards, which allow qualified users to use their benefits to make purchases.
- Prepaid debit cards enable consumers who do not have a bank account to make electronic purchases up to the amount preloaded on the card.
Frugal shoppers may prefer to use debit cards because there are usually little or no costs associated with them unless they spend more than they have in their account and suffer an overdraft fee. (The no-fee benefit does not apply to prepaid debit cards, which commonly impose activation and usage fees, among other expenses.) On the other hand, credit cards typically impose yearly fees, over-limit fees, late payment fees, and a slew of additional penalties, in addition to monthly interest on the card’s outstanding balance.
Advantages of Using Debit Cards
Debit cards, like credit cards, can offer both advantages and disadvantages.
Avoid incurring debt.
A debit card uses money that the user already owns, removing the risk of incurring debt. In addition, retailers are well aware that when individuals pay with a card, they tend to spend more than when they pay with cash. Therefore, impulsive spenders can avoid the temptation of credit and adhere to their budget by using debit cards. This can help you avoid high-interest debt.
Fraud safeguards
Furthermore, certain debit cards, particularly those issued by payment processors such as Visa or Mastercard, are beginning to offer more of the same safeguards as credit card users.
The key is to report fraud or theft as soon as you become aware of it. The time frame in which you report fraudulent purchases determines your liability. If you wait too long to notify the bank that your card has been used for illicit purchases, you may be held liable for some or all of the losses.
There is no annual charge.
Many credit cards have an annual fee, whereas debit cards do not. There is also no fee for using your debit card to withdraw cash from an ATM at your bank. On the other hand, credit cards may levy a cash advance fee and a high-interest rate in exchange for convenience. You may, however, pay additional fees to keep your checking account open.
The Drawbacks of Using Debit Cards
The main disadvantages of using debit cards, like with credit cards, are credit score implications and expense.
There are no incentives.
You will not earn points, miles, or cash back on debit card purchases unless you have rewards checking account. Because rewards can save you money depending on how you redeem them, you may be missing out if you only use a debit card.
It won’t help your credit.
Building good credit entails demonstrating to lenders that you can properly return the money you borrow. Unfortunately, you don’t have the option to do that when you use a debit card linked to your bank account thus using a debit card alone won’t help you establish or build a credit history.
Fees
Although there are no annual fees for debit cards, you may have to pay other costs to have a checking account. Monthly maintenance fees, overdraft fees if you overspend from your account, returned item fees, and international ATM fees if you use your debit card at a machine owned by another bank or financial institution are examples of these.
