What is a debit card?
A debit card is a payment card that makes payments by debiting money directly from the customer’s checking account, rather than borrowing money from a bank or card issuer. Debit cards offer credit card convenience and similar consumer protections when issued by a major payment processor such as Visa or MasterCard.
There are two types of debit cards that do not require the customer to have a checking or savings account, as well as a standard type.
Points
- Standard debit cards are debited to your bank account.
- Electronic Benefits Transfer (EBT) cards are issued by state and federal agencies to allow eligible users to purchase their benefits.
- Prepaid debit cards give people without access to a bank account a way to make electronic purchases up to the amount preloaded on the card.
Frugal consumers may prefer to use a debit card because there are usually few or no associated fees unless users spend more than their account and are charged an overdraft fee. (The no-fee advantage doesn’t apply to prepaid debit cards, which often charge activation and usage fees, among other costs.) In contrast, credit cards typically charge annual fees, over-limit fees, late payment fees, and more. Penalties other than monthly interest on card balance.
Advantages of using a debit card
Just like credit cards, debit cards can have ups and downs.
Avoid debt
A debit card draws money on the money the user already has, eliminating the risk of taking out a loan. Retailers know that people typically spend more when using plastic than they would if they were paying cash.
By using a debit card, impulsive spenders can avoid the temptation of credit and stick to their budget. This can help keep you out of high-interest debt.
Fraud Protection
In the past, credit cards offered far more fraud protection than debit cards. Some debit cards—especially those issued by payment processors, such as Visa or Mastercard—are beginning to offer more protection than that enjoyed by credit card users.
The key is to report fraud or theft as soon as you notice it. Your liability for fraudulent purchases is determined by the period in which they are reported. If you wait too long to notify the bank that your card has been used for an unauthorized purchase, you may be held liable for some or all of the loss.
Since a debit card is linked directly to a bank account, fraudulent purchases can quickly dry up the account or lead to an overdraft. This cannot happen with credit cards as they are returned at a later date.
No Annual Fee
Although many credit cards charge an annual fee, debit cards do not. There is no charge for withdrawing cash from your bank’s ATM using your debit card. Credit cards, on the other hand, may charge cash advance fees and higher interest rates for that convenience. However, you may pay other fees to maintain your checking account
tip
Cash advances on credit cards have no grace period; Instead, interest starts accruing immediately.
Disadvantages of using a debit card
As with credit cards, the biggest downsides to using a debit card include the credit score impact and costs.
No Rewards
Unless you have a rewards checking account, you won’t earn any points, miles or cashback on purchases made with your debit card. Because rewards can save you money, depending on how you redeem them, you can lose them if you only spend with a debit card.
Will not build credit
Building good credit means showing lenders that you can responsibly repay the money you borrow. When you spend with a debit card linked to your bank account, you don’t have the opportunity to do so, so using a debit card won’t help you establish or build a credit history.
Fees
While debit cards don’t have an annual fee, you may pay other fees for keeping a checking account. These may include monthly maintenance fees, overdraft fees if you overspend from your account, fees for returned goods, and foreign ATM fees if you use your debit card at another bank or financial institution’s machine.
Are debit cards the same as credit cards?
While they may look similar and share similar features such as 16-digit card numbers, expiration dates, and branded Visa or MasterCard logos, credit cards and debit cards differ in important ways. The main difference is that debit cards are linked to a bank account and the money is withdrawn directly (like a cheque ). A credit card, on the other hand, does not withdraw any money immediately and is subject to any accrued interest charges that must be paid back in the future.
Can you earn rewards with a debit card?
Generally, no. While debit cards don’t earn points or miles for every purchase, the accounts they draw money from can offer perks to users in exchange for certain transactions. Standard debit cards also often offer a round-up feature that allows users to transfer small amounts of money to a savings account, a feature not possible with credit cards.
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