There are several different versions of a revolving line of credit with debit card access. These cards should be used with care, especially when they are attached to an equity line or retirement account.
Traditional versus Hybrid Debit Card
A traditional debit card can be used to access funds from a checking account in order to purchase goods and services. Debit cards feature logos of major credit cards, such as Visa, MasterCard, or American Express. Cards are used similarly to credit cards in the sense that they can be swiped through a credit card machine in order to make the purchase with a personal identification number (PIN) or with a signature. The money from the purchase is withdrawn directly from the cardholder's checking account. Usually there is no credit extended when a debit card purchase is made.
The difference with a hybrid debit card is that it can access other accounts as well, making it possible to make a purchase with the card even if there are not sufficient funds in the checking account. A revolving line of credit with debit card comes in a few different forms.
Interest-Bearing Revolving Line of Credit with Debit Card
Lines of credit are often extended to customers through a financial institution as a form of overdraft protection for the checking account. The line of credit may be available for other purposes or may solely be available when making a purchase beyond the balance of the checking account. Interest is almost always charged for this account. In some cases there is no grace period before interest starts to accrue.
In this instance, if the cardholder attempts to make a purchase without sufficient funds available, the deficit is automatically withdrawn from the line of credit. The cardholder then makes a payment on the line of credit when the statement cycle comes due. In many instances, account holders have the option of paying the balance of the line of credit in full or making the minimum balance and paying interest charges on the remaining balance, much like a credit card account.
Line of Credit Attached to Equity Line
New mortgage programs allow homeowners to tap into their equity line of credit by using a debit card. Other factors are involved with this relatively complicated mortgage equity line product, but the basics involve depositing paychecks directly into a mortgage loan account and then making purchases using a debit card linked to the equity line of credit.
This program allows frugal homeowners to pay off their mortgages early, but this debit card product can cause real problems for consumers who do not pay attention to their spending because they may find themselves making very little leeway on their mortgage loans because of their debit card usage.
401(k) Debit Cards
Some companies offer debit cards linked to a loan secured with a 401(k) retirement account. These cards pull money from a revolving line of credit from the loan. Like a credit card, a payment is required monthly and interest can accrue quickly when balances are not paid in full. Since purchases on this card usually fall into the category of a cash advance, interest may start accruing immediately instead of a grace period being available.
While tapping into a retirement account may allow a person to receive credit that they may not otherwise be able to find at a low interest rate, it can be an easy path to financial problems. While money is not withdrawn directly from the retirement account, if the cardholder defaults on payments or quits working for the employer there may be financial repercussions that demand immediate repayment.
Various financial institutions offer different debit card products. If you're looking for a revolving line of credit for your debit card then you should speak to your preferred bank or credit union to find out what products are available.