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What is a Debit Card?

February 01, 2021 · 10 minute read

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What is a Debit Card?

There’s an old saying that “cash is king,” but for many consumers, it’s their debit card that’s the real workhorse in their wallet.

A debit card serves a dual purpose–you can use it to get cash from an ATM, and also reach for it to make purchases at both physical and online retailers.

While debit cards look, and sometimes act, like credit cards, these plastic payment cards actually function in a very different way.

Debit cards deduct money directly from a consumer’s account to pay for a purchase.

Unlike credit cards, there is no borrowing involved. That means there won’t be a bill to pay later. But debit cards also come with lower spending limits.

Here are some useful things to know about getting, using and safeguarding your debit card.

Debit Cards Defined

A debit card is a payment card that allows you to spend money without carrying cash.

Most debit cards look just like credit cards. They typically feature an account number on the front, along with the cardholder’s name and the expiration date.

There may also be a smart chip on the front, along with a logo in the lower right-hand corner that tells you which payment network the card is connected to (such as Visa, Mastercard, or Discover). On the back you’ll likely see a place to sign, as well as a three-digit security code (CCV).

But there are some major differences between debit cards and credit cards.

When someone uses a credit card the money is borrowed. Credit card holders receive a bill every month for what they owe, and the balance must be paid in full or they can be charged interest.

When you use a debit card to get cash or make a purchase, the money comes directly from an account you have with a bank or some other type of financial institution. The funds are your own, so there’s nothing to pay back later.

How Do You Get a Debit Card?

There are a few ways to get a debit card.

Checking accounts (whether at a bank, credit union, or online financial institution) typically come with a debit card that can be used to get cash at ATMs or to make purchases.

A brick and mortar bank may be able to issue customers a new debit card right away. With an online institution, it might take a few days for the card to come by mail.

Card holders also receive a personal identification number (PIN), which is a security code they’ll use with their account.

In some cases, card holders may be able to choose their PIN when they open their account. Or they may get a temporary PIN in the mail with instructions on how to change it, if they want to, to digits they’re more likely to remember.

Typically, you can activate a new debit card at the financial institution’s website, at one of its ATMs, or by calling a designated phone number and answering or keying in some basic identifying information.

If you don’t have a bank account, or don’t want a debit card that’s linked to your account, you can get a prepaid debit card online or at various retail stores.

Some prepaid cards are meant for one-time use, and some can be reloaded with additional funds through an app, direct deposit, money transfer, or with cash at a store that offers this service.

Prepaid cards will work at any ATM or retail location that accepts the card’s payment network. But prepaid debit cards tend to come with more fees and fewer protections than traditional debit cards.

Where Can You Use a Debit Card?

A debit card can be used to make withdrawals at an ATM, to make in-person or online purchases, and to make automatic payments for recurring bills.

Each type of transaction works a bit differently. Here are tips for using your debit card.

At the ATM

One of the great conveniences a debit card has to offer is that it can be used to get cash (or make a deposit, transfer funds, or just view your account balance) just about anywhere there’s an ATM.

You just push your debit card into the slot, and enter your PIN to get access to your account. You can then choose the appropriate transaction(s) from the menu on the screen, and follow the prompts.

Once you finish and retrieve your receipt and debit card, it’s a good idea to double check that the machine has returned to its welcome screen before turning it over to the next user.

If you use an ATM that’s approved by your bank, you should be able to withdraw money without paying anything for the convenience.

But if you use a non-network ATM, you could end up paying a non-network fee to your bank and an ATM surcharge to the ATM’s owner. If you’re overseas, you might also be charged a foreign transaction fee.

If you’re a big-time ATM user, you might be able to avoid those fees by scouting out in-network ATM locations in your area or where you are going to be travelling ahead of time, or by opening an account at a financial institution that doesn’t charge fees and/or reimburses certain fees.

Making a Purchase in Person

The process for using a debit card to purchase goods or services can be a little different from one merchant to the next.

Typically a customer will be asked to swipe, insert, or tap their debit card themselves at a card reader on the counter, then be prompted to authorize the purchase, either by entering their PIN or by signing just as they would with a credit card.

Either way, the money to pay for the purchase comes out of the card holder’s account. But there are some behind-the-scenes differences in how these two types of transactions are processed.

When you make a PIN-based transaction, for example, it will be processed through an electronic funds transfer (EFT) system, and you can expect the money to come out of your account the same day.

Signature-based transactions, on the other hand, are processed through a digital credit card network, and are treated as pending until they’re completely authorized, cleared, and settled. So it may take a few days before the card user’s account balance reflects the debit.

The transaction method also may affect any points or other rewards a card holder is hoping to earn on a purchase. Some programs reward PIN purchases only, some reward signature purchases only, and some reward both.

A retailer also may allow customers making a PIN transaction to ask for cash back on top of the total amount of their purchase, so they don’t have to make a separate trip to an ATM.

If your purchase at a store was $40, for example, you could ask for $20 back in physical cash, and you’d receive $20 from the cashier and a receipt for the combined amount of $60 taken from your account.

In some cases, customers may have to pay a small fee (much like a non-network fee) or make a minimum purchase, to access this convenience.

Making a Purchase Online

You may not see “debit card” listed as a payment method when you want to buy something online. But if there’s a credit network logo on the front of your debit card, you should be able to use your card for the transaction.

When a merchant’s website asks for payment method, debit card users can choose “credit card,” then enter their debit card account number, expiration date, and three-digit security code (CCV) to have the purchase processed as a signature transaction. (A PIN transaction won’t be a payment option online.)

Using Autopay

A debit card also can be used to make automatic payments on monthly bills, such as student loans, car loans, subscriptions and memberships, and utility bills.

To set up automatic debit payments, the card holder provides the company with a debit card account number, expiration date, and CCV, and authorizes future electronic withdrawals. The payment can be the same amount every month, or, if the amount is likely to vary a bit from month to month (as utility bills generally do), the card holder can specify a range.

With automatic debit payments, card holders give businesses permission to take payments from their account, which is different from arranging with the bank to make authorized recurring payments. In both cases, however, it can be important to track those payments and be sure the transactions are accurate.

Is There a Difference Between a Debit Card and an ATM Card?

Some people may still refer to a debit card as an “ATM card,” but there is a difference.

A debit card can be used to make withdrawals at an ATM, but it also can be used to make purchases and to pay bills.

An ATM card can be used only to get funds from a checking or savings account at an ATM machine.

Is it Better to Use a Credit Card or Debit Card?

As with most financial tools, it’s up to each individual to decide what works best for them. Here are some pros and cons of using a debit card vs. a credit card.

Budgeting

Using a debit card for a majority of transactions may make it easier to stick to your budget, because you can spend only what you have in your account.

You aren’t borrowing money as you would with a credit card, so you may find yourself paying more attention to every purchase and whether you can really afford it.

With a credit card, it can be tempting to pay now and worry about the bill later. If you’re super disciplined about paying off your entire credit card balance every month, that might work for you.

But if, like many Americans, you’re likely to carry forward a balance on your credit card (or cards) every month, the debt could eventually grow out of control with interest.

Convenience

Both debit and credit cards are easy to use, but there are a few ways in which debit cards may have an edge when it comes to convenience.

•  It’s easier and cheaper to get quick cash with a debit card. You can get a cash advance with a credit card, but you may have to pay a hefty fee and a higher interest rate on the advance. And with a cash advance you could be charged interest starting on the day you receive the money—there’s no grace period as there is when you make a purchase with a credit card.
•  You may be able to get physical cash back when making a purchase. That benefit usually isn’t available with a credit card.
•  It’s generally easier to get a debit card than a credit card. Most financial institutions will automatically give customers a debit card when they open an account. Getting a credit card can be harder—especially if you’re under 21, don’t have any verifiable income, have a poor (or no) history with credit. The requirements are tougher for credit cards because lenders want to be sure their borrowers are capable of repaying their debts.

Penalty Fees

No matter what kind of card you use—debit or credit—you could face a penalty fee if you spend more money than you currently have available.

With a debit card, you may incur an overdraft fee if you spend more than you have in your account (when making a signature purchase, for example, or when using autopay).

With a credit card, you could face an over-limit fee (if you push your balance over your credit limit), a late-payment fee if you fail to make your minimum monthly payment, or a returned payment fee if for some reason your payment isn’t accepted.]

Rewards

Credit cards can be more likely to offer extra perks than debit cards, such as cash-back rewards or points that can be used for travel, though some debits do offer points and rewards.

Spending Limits

One of the things that can make a debit card really useful is that it’s difficult to spend more than you have. But that also can be a drawback if you need to make an expensive purchase.

Even if you have a hefty amount of money in your account, you may encounter a daily spending limit when using a debit card.

Those daily limits are meant to protect account holders by limiting the amount fraudsters could spend with a stolen debit card. But if you aren’t aware you have a limit—or don’t know what the limit is—you could get an unpleasant surprise when making a major purchase.

If you find out you have a debit limit and feel it’s too low, you may be able to request a temporary increase. Or you can ask about having the limit raised permanently for online purchases, in-person purchases, ATM withdrawals, or all three.

Of course, credit cards have spending limits, too, in the form of available credit. Those who go over their credit limit could have their card declined or they might have to pay a fee. Credit card users can check their monthly statement online or in person, or call customer service to see where they stand.

Building Credit

This may seem like a bit of irony, but even though consumers may be trying to be financially responsible by using a debit card whenever they can, they won’t be directly helping their credit score.

Lenders use credit scores to determine if a person qualifies for a loan or credit card, or a better interest rate when borrowing money.

A credit score—which is based on past credit history—may help lenders predict how risky or reliable that person might be when it comes to making payments on a loan or line of credit.

When someone uses a debit card to pay for goods and services, the money is coming from their own account—so there’s no history of borrowing to look back on.

If you use a debit card to stay out of debt and to make car or student loan payments on time, it might indirectly help your credit standing. But it isn’t the same as using a credit card or loan—cautiously—to help build your rep with lenders.

Safety

One of the big question marks about debit cards is if they’re safe to use. After all, your card is linked to your bank account, so if a thief gets hold of your physical card or just your card number, any money they take is yours—not the bank’s.

And that could cause a lot of problems if you don’t notice and report the problem swiftly, according to the Federal Trade Commission (FTC) .

Debit card use is protected by the Electronic Fund Transfer Act (EFTA), which gives consumers the right to challenge fraudulent charges. But card holders have to act with some speed to get full federal protection.

And those protections aren’t quite as substantial as the federal law that covers credit card theft, the Fair Credit Billing Act (FCBA).

If someone makes unauthorized charges with your debit card number, and you didn’t lose your card, you aren’t liable for those transactions if you report the charges within 60 days of receiving your statement.

You also could have zero liability if the card was lost or stolen and you reported it before any unauthorized charges occurred.

If you report a lost or stolen card within two business days, your loss may be limited to $50. But if you wait more than 60 calendar days after you receive your statement to make a report, you could lose all the money a thief drains from any account linked to your debit card.

That may sound scary, but if your debit card is backed by a credit card network (like Visa or Mastercard), you likely have the same “zero liability” protections credit card users have.

The Takeaway

You can use a debit card to quickly get cash, either from an ATM or by using the cash-back function offered by many merchants.

You can also use your debit card to purchase goods and services, and even use it for autopay.

Debit cards work differently than credit cards. Instead of borrowing the money, the funds are being taken directly out of your account.

All debit cards are not the same. There can vary in terms of ATM access, fees, spending limits, security, and points/reward programs.

Prepaid debit cards are also an option if you would prefer to have a debit card that is not linked to your checking account.

Looking for a debit card that provides perks and protections but frowns on fees?

SoFi Money® now offers the SoFi Money World Debit Mastercard®, which offers contactless payment, purchase protection, and a cash back rewards program. And, withdrawing cash is fee-free at 55,000+ ATMs worldwide.

You can easily activate the SoFi Money World Debit Mastercard using the SoFi Money app.

Check out everything a SoFi Money cash management account has to offer today.



SoFi Money®
SoFi Money is a cash management account, which is a brokerage product, offered by SoFi Securities LLC, member FINRA / SIPC .
Neither SoFi nor its affiliates is a bank. SoFi Money Debit Card issued by The Bancorp Bank. SoFi has partnered with Allpoint to provide consumers with ATM access at any of the 55,000+ ATMs within the Allpoint network. Consumers will not be charged a fee when using an in-network ATM, however, third party fees incurred when using out-of-network ATMs are not subject to reimbursement. SoFi’s ATM policies are subject to change at our discretion at any time.
The SoFi Money® World Debit Mastercard® is issued by The Bancorp Bank pursuant to license by Mastercard International Incorporated and can be used everywhere Mastercard is accepted. Mastercard is a registered trademark, and the circles design is a trademark of Mastercard International Incorporated.
Third Party Brand Mentions: No brands or products mentioned are affiliated with SoFi, nor do they endorse or sponsor this article. Third party trademarks referenced herein are property of their respective owners.
External Websites: The information and analysis provided through hyperlinks to third party websites, while believed to be accurate, cannot be guaranteed by SoFi. Links are provided for informational purposes and should not be viewed as an endorsement.
As of 6/9/2020, accounts with recurring monthly deposits of $500 or more each month, will earn interest at 0.25%. All other accounts will earn interest at 0.01%. Interest rates are variable and subject to change at our discretion at any time. Accounts opened prior to June 8, 2020, will continue to earn interest at 0.25% irrespective of deposit activity. SoFi’s Securities reserves the right to change this policy at our discretion at any time. Accounts which are eligible to earn interest at 0.25% (including accounts opened prior to June 8, 2020) will also be eligible to participate in the SoFi Money Cashback Rewards Program.
Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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