Debit cards are linked to bank accounts and carry the logo of a major credit card brand such as Visa or Mastercard. These cards can be used anywhere the specified brand is accepted. These cards are also useful for making withdrawals and deposits at ATMs. In 2016, debit cards represented 70 percent of payment cards globally, with an expectation of reaching 72 percent by 2021.
How Debit Cards Compare to Other Cards
While debit cards look similar to other types of cards issued by financial institutions, there are important difference between the various 'plastic' options available to consumer.
Most banks offer ATM cards. Like a debit card, these cards are linked to a bank account. However, they do not have a Visa or MasterCard logo and cannot be used to make purchases. They can only be used to make bank transactions, such as withdrawing or depositing funds, or transferring funds from one account to the other.
The biggest difference between debit and credit cards, is there is no credit line associated with a debit card. Because this type of card is connected to your bank account, your spending is limited to the amount of money you have in the associated account. Because you aren't actually borrowing any money when you use a debit card, you aren't charged interest on your purchases.
With credit cards, you are extended a line of credit to use, which you pay back later, usually with monthly payments. This also means that you will pay interest with a credit card.
Debit cards and prepaid are similar in that spending is limited to available funds, but there are also significant differences. Prepaid cards require that you load them money before you can use them, but aren't linked to a bank account.
Another big difference is that prepaid cards typically carry different fees and can cost you much more than a debit card to use. For instance, prepaid cards often charge activation and set up fees, as well as monthly or annual fees on top of smaller fees to load the card and withdraw.
Why Choose a Debit Card?
According to a NASDAQ.com article, in 2014, 50 percent of consumers said they were most likely to use debit cards at supermarkets, 39 percent at gas stations and 37 percent at dine-in restaurants. There are a number of reasons you might find it beneficial to use a debit card over another form of payment. Examples include:
- Stay out of debt: With a debit card, you are not making purchases against borrowed money that has to be paid back. This means that you are not going into debt, which often occurs when using a credit card to buy things. Instead, you are pulling funds directly from your own bank account.
- Earn rewards: Some banks and financial institutions offer rewards and perks when you use your debit card. This can vary from cash back to earning interest on the funds you have in your account.
- Better foreign exchange rates: If you travel overseas, you might find that you get better exchange rates using your debit card to withdraw funds from an ATM or swiping your card when you shop than you would if you exchanged cash at a bank or airport. Make sure you check your bank's foreign transaction and ATM fees first to be sure.
- Access to cash back: You can use debit cards to get cash back from certain merchants at the point of sale, which can save you an extra trip to the ATM.
Examine the Fees
It is important to examine the fees that might be subtracted from your account balance as a result of using your debit card. Whether your bank account has a monthly maintenance fee or not, there could be additional fees for certain types of debit cards transactions. Common fees you might encounter with a debit card include:
- charge $2 to $3 per ATM transaction if you use a machine out of your financial institution's network. Make sure you take a look at the ATMs you plan to use with your card to determine if it will become costly.
- Foreign transaction: If you use your debit card out of the country, you need to be aware of foreign transaction fees associated with using your debit card. This fee often ranges from 1% to 3% of your purchase.
- Card replacement fees: Some banks charge fees to replace a lost or stolen debit ard.
- Overdraft: Because a debit card is linked to a bank account, there is a risk of overdraft. If your account includes overdraft protection, that can keep you from having a purchase denied. However, you will have to pay an overdraft fee, which costs an average of $34, for every transaction the bank clears that exceeds your balance.
Is it Safe to Use a Debit Card?
Because debit cards are linked to bank accounts, there is a chance that theft or hacking of the card can lead to an empty bank account. This is one of the reasons that consumers sometimes prefer to use credit cards over debit cards.
If your debit card is lost or stolen and is reported within 60 days, you could still end up being liable for up to $500 in fraudulent purchases. If you wait more than 60 days to report the incident, you'll have no protection at all. However, with credit cards, the maximum liability for fraudulent transactions is $50, with many cards offering $0 fraud liability.
Newest Debit Card Technology
As with credit cards, new technology is making debit cards safer and better for shoppers.
- Most debit cards now come with chip and PIN and chip and signature technology, designed to provide increased security and protection from fraud and identity theft.
- Increased use of mobile payment options like Apple and Google Pay and wearable devices are allowing debit transactions without a physical card.
Making a Wise Decision
Rather than directly selecting a debit card, you'll likely need to find the best bank account for your needs first. As you narrow down your selection, be sure to take debit card terms and benefits into consideration. Be sure to find out:
- Are there any extra fees for certain types of purchases or ATMs?
- How much will the card cost you? Is it included with a free checking or savings account?
- Can you earn any extra rewards or perks when you use the card?
- Are there additional benefits, such as lower fees for foreign transactions or overdraft protection?
Check With Your Financial Institution
Your bank or credit union is the best resource for details about specific debit card accounts. Your banker can help give you an idea of the different bank account and debit card options that are available. If you aren't happy with the options, shop around with other financial institutions. You might find one that offers a card linked to your bank account with fewer fees, as well as other account holder benefits.