Debit

Debit
A debit is any transaction that reduces the money in your bank account. The term is commonly used in reference to debit cards, which draw funds directly from your account.

What is Debit?

“Debit” refers to any transaction that pulls money from your account.1 It’s the opposite of a “credit,” which refers to a deposit that increases the money in your account.

“Debit” is most commonly used in reference to debit cards. It is also a term that’s used in double-entry accounting, but in that context it’s meaning is different.

What is a Debit Card?

A debit card, also called a “check card,” is linked to your checking account. You can use it to make purchases, withdraw cash at ATMs, deposit checks, or transfer funds between your accounts. Debit cards are usually provided free when you open a checking account.

Debit cards are not the same as credit cards, which aren’t connected to your checking account. With a debit card, you need to have enough money in your account to pay for a purchase. If you don’t, the transaction will be denied or you’ll overdraw your account.

What fees are associated with Debit Cards?

When using a debit card, be careful to avoid some common fees:

  • Out-of-Network ATM Fee — If you use an ATM that’s outside your bank’s network, you might get charged a fee. The out-of-network fee is in addition to the fee charged by the ATM.
  • Foreign Transaction Fees — This fee usually applies if you make a purchase or use an ATM outside of the U.S. It typically amounts to one to three percent of the purchase price or amount withdrawn.
  • Debit Card Replacement Fee — If you lose your card, most banks will charge you a small fee and then mail you a new one.
  • Overdraft Fee — If you have overdraft protection and you use your card to make a purchase without the necessary funds in your account, the bank will cover the cost and you will owe the amount of the purchase plus an overdraft fee.
  • Insufficient Funds Fee — If you do not have overdraft protection or sufficient funds in your account, your purchase will be declined and you will have to pay the bank an insufficient funds fee.

What is a prepaid Debit Card?

An alternative to standard debit cards is a prepaid debit card. These cards do not link to your checking account—instead you load money onto the card at an issuing store. There are some things that these cards can’t be used for that regular debit cards can, like making wire transfers or writing checks. Some people like prepaid cards because they help them control their spending—you can use the amount you load and no more. They’ve become popular in recent years, but they’re exempt from consumer protection laws and often come with an array of expensive fees.2

What is an ATM card?

An ATM card is like a debit card but it can only be used to make transactions at ATMs. (You can’t use it like a debit card to make purchases, for instance.) Banks and credit unions used to give you an ATM card when you opened a checking account. Now they usually give you a debit card instead.

What’s the difference between a Debit Card and a Credit Card?

Debit and credit cards are not the same. While a debit card uses the funds that you have in your checking account, a credit card allows you to borrow money up to a certain limit.

Credit cards often offer rewards like travel points, discounts, and more. In addition, credit card companies report your use and payment history to the credit bureaus. Therefore, if you pay your bills on time and don’t max out your card, a credit card comes with the added benefit of building your credit history and raising your credit score.3

Why are Debit Cards bad? Why are Debit Cards good?

Unlike credit cards, debit cards don’t come with the risk that you’ll spend beyond your means. Since they pull money directly from your account, generally, you can only buy what you have the money to pay for. For this reason, debit cards are sometimes considered a good option if you want to limit your spending.

However, one risk with debit cards is that you’ll overdraw your account. This occurs when you buy something and don’t have enough money in your account to pay for it. If you’re enrolled in an overdraft protection program—and many people are, sometimes without knowing it—your bank will allow the purchase to go through. However, you’ll be charged a fee, and the money that the bank fronts to cover the purchase essentially becomes a loan. You’ll be responsible for paying it back with interest that is often very expensive.

For these reasons, debit cards are neither bad nor good—it’s all in how you use them.

Are Debit Cards safe?

As with credit cards, debit cards are subject to fraud. But with debit cards, it may take longer to sort things out with your bank. In the meantime, the money you lost will still be missing from your account.

If a fraudulent purchase appears on your credit card, you can alert the card issuer and decline the charge. However, if fraud occurs with a debit card, the money is removed from your account and you might have to wait for your bank to replace it.

Your debit card can be compromised and your numbers stolen in a variety of ways. Typically, it occurs when you use your card to withdraw money or make a purchase. Your numbers may be hacked, “skimmed” (when someone plants a scanning device over a card slot), or simply written down if they’re visible to strangers. Experts warn that four places in particular pose a risk: ATMs with public accessibility (one that’s on a street), gas stations, online merchants, and at restaurants when the card leaves your hands and other people can see your numbers.4

Bottom Line

Debit is a term that refers to any transaction that takes money out of your bank account. It’s commonly used in reference to debit cards, which function differently than credit cards and are sometimes considered a good option to avoid spending beyond your means. Debit cards come with certain risks, however, like fraud and the potential to overdraw your account. When using a debit card, take precautions to protect yourself from fraud and spend carefully to avoid fees.

References

1 “Glossary of Banking Terms.” Bank of America, https://www.bankofamerica.com/deposits/manage/glossary.go. Accessed 13 March 2017.

2 Gustke, Constance. “Pros and cons of prepaid debit cards.” Bankrate, 8 Aug. 2011, http://www.bankrate.com/finance/savings/pros-and-cons-of-prepaid-debit-cards-2.aspx. Accessed 10 March 2017.

3 Cussen, Mark P. “Credit Vs. Debit Cards: Which Is Better?” Investopedia, 22 Feb. 2017, http://www.investopedia.com/articles/personal-finance/050214/credit-vs-debit-cards-which-better.asp. Accessed 10 March 2017.

4 Bell, Claes. “4 Risky Places to Use Your Debit Card.” Bankrate, 31 Oct. 2016, http://www.bankrate.com/finance/checking/risky-places-swipe-debit-card-1.aspx. Accessed 10 March 2017.