A “debit card” looks and feels like a credit card, but works quite differently than a credit card.
A debit card can be used as a credit card in almost any location including gas stations, restaurants, and many other merchants, but differs from credit cards because it instantly withdraws money from your bank or investment account to pay for any purchases made with the card.
This method differs greatly from credit cards and charge cards, which allow consumers to make charges up to a pre-set spending limit, at which time a statement will be sent out with the balance and available payment options.
With a debit card, purchases instantly deduct the necessary funds from the consumer’s account, and never allow the consumer to spend more than what they have available in the associated account, aside from any incidental charges over the limit.
Most banks these days offer debit cards, which may also be referred to as bank cards, check cards, or ATM cards, when you open a checking or savings account. These cards are tied to the cardholders’ bank account, and allow the consumer to withdraw money at ATMs or make purchases from merchants worldwide.
Advantages and Disadvantages Of Debit Cards
The main advantage to using a debit card is that a consumer can only spend that they have in their bank account. This may help a consumer avoid accruing debt and paying finance charges.
A disadvantage seen with some debit cards is that they don’t offer the same rights most credit card companies include in their contracts. Important measures such as buyer protection, fraud protection, hassle-free returns, error resolution, and more.
And if your debit card is compromised, your associated checking/savings accounts could be at risk. This could lead to quite a few headaches and unwanted stress.
Many debit cards also don’t offer the rewards seen with most credit cards, such as cash back rewards, though they’re beginning to come around these days.
All things considered, a debit card is a necessary component of your financial arsenal, and should be used in place of credit where applicable with trusted merchants. It’s wise to carry a debit card in case you need cash, or if a merchant doesn’t accept credit, which is the case at certain low-cost gas stations and other institutions.
It’s also wise to back up a debit card with a credit card issued by the same bank. The credit card can act as overdraft protection in an instance when you spend more than what’s available in your bank account. It’s usually free, and offered by most banks as a way to avoid unnecessary fees that arise when you’re overdrawn.
Tip: Keep in mind that your debit card likely won’t be reported to the credit bureaus, so you won’t be successfully building your credit history unless you secure a line of credit found with a typical credit card.