Debit Card: What Is It and How Does It Work?

Do you ever stop to think about all the cards that are in your wallet? There are quite a few, aren’t there? You might have ATM cards, prepaid cards, credit cards, and, of course, there are debit cards. 

But what is a debit card? Apart from being a small, thin piece of plastic for making payments, how does it function and why should you consider applying for one at your financial institution or bank? What benefits can you expect to receive when using such a card? 

In this blog post, we’ll answer all of these questions and more.

What Is a Debit Card?

In short, a debit card is a payment card issued by a bank or card issuer to a cardholder. The main purpose of a debit card is to allow cardholders to spend money without having to carry cash. 

Debit cards can be used to make withdrawals at cash machines or ATMs, initiate transfers, make online purchases via a mobile phone or other connected devices, view bank statements, pay bills, and more. 

A debit card typically has the following characteristics:

• Usually, a 16-digit printed or embossed card number;
• A magnetic stripe;
• A signature strip panel;
• A card security code, or CVV;
• The issuing bank’s logo;
• A hologram;
• The card brand logo (the most popular are Mastercard and Visa debit cards but there are many others);
• An expiration date;
• The cardholder’s name;
• An EMV chip.

Keep in mind that the latter does not appear on all cards and the presence of this feature will depend on your issuing bank. 

You may be wondering – isn’t this just like a credit card? In essence, debit cards are very similar to credit cards. However, there are fundamental differences that separate one from the other. 

The key point with debit cards is that they enable you to use existing funds from your bank account. 

In some cases, you’ll have an overdraft facility available if you exceed the actual amount of funds in your account. However, in most cases, your debit or checking account will only enable you to use your physical card with funds that you already have.

7 Advantages of Debit Cards

Owning a debit card and making debit card purchases is extremely popular nowadays. This is no coincidence – it all has to do with the wide array of benefits that this type of card offers to cardholders.

Below, we take a look at some of the most important advantages of owning and using debit cards.

Easy to Obtain

Debit cards usually only require that you fill out an application form for a checking account with your bank or financial institution. 

However, since you are not obtaining a line of credit, there’s no need to prove a strong credit history or credit score to your bank. This makes getting such a card quite a simple process that you could achieve through an authorised bank or credit union.

Safe and Secure

We all know that carrying cash with us is not only unsafe, it’s also becoming an outdated way to shop. This is where debit cards come in. They are an excellent tool if your card gets stolen because you can quickly contact your bank or financial institution and stop anyone from using your card by blocking it.

Also, those cards can protect you against theft because they require a PIN to withdraw cash from an ATM, and sometimes, a PIN is also required if you make transactions on a card machine. However, this will depend on the amount you’re paying. 

In addition, some debit cards offer cybersecurity protection if you engage in online shopping to ensure that only you – the authorised individual in question – can make purchases with your own card.

No Debt, Service Fees, or Interest Charges

Credit cards are famous for the interest that’s charged on outstanding amounts. These rates can fluctuate and you could pay anything from 10% to as high as 32.99%, depending on your bank or depending on whether you’ve incurred late charges. Such amounts can add up and cost you more than initially planned for.

With a debit card, you can avoid expensive interest fees. You also don’t end up in debt as you’re using funds that you already have available to you instead of relying on your bank for credit. 

You can avoid some card fees by withdrawing cash from your bank’s ATM network. Withdrawing from anywhere else could end up costly. This applies to withdrawals from ATMs abroad.

Helps You Stay On Top of Your Spending

Because debit cards and their associated checking accounts mean that you pay or withdraw only what you have, you can make real-time payments and stick within your means.

Most banks or financial institutions offer a mobile app that can help you keep track of spending. 

You can also avoid making impulse purchases with a credit card as the typical payment date for these purchases is in the following month, usually with a minimum payment that’s lower than the full balance due.

Improve Your Budgeting

When you make a payment with a debit card, the money is almost immediately taken out of your account. You can use this transaction data to plan your budget by analysing your past expenditures and making informed decisions about your future purchases. 

This means that you’ll have better tools to be more accountable to yourself and to spend responsibly. 

Earn Interest Through Your Checking or Savings Account

Your card can also help you earn some extra added income. That is if there’s a minimum daily balance in your account. 

If this is the case, you could earn compound interest as well as have the added convenience of using your debit card for ATM and cash withdrawals.

Earn Rewards 

You’ve heard of credit card rewards, but what about debit card rewards? Yes, it’s possible! 

It just depends on your financial institution, but you can earn points for money spent and then redeem these points for either travel, shopping, gift cards, or more. 

Debit Card Refunds

Debit cards offer a convenient way to make purchases, withdraw cash, and pay bills directly from your bank account. 

Best of all, you can also enjoy peace of mind knowing that you can make a debit card refund.

However, it’s essential to understand how refunds work when using your debit card. Unlike credit cards, debit card refunds can take a few days to process, as the refunded amount must be credited back to your bank account. 

How Does a Debit Card Work?

As mentioned above, a debit card typically works by enabling you to use funds that you already have. 

They work as a cross between an ATM card and a credit card. Here are the similarities: they are like ATM cards because they enable you to withdraw cash from ATMs. Meanwhile, they are similar to credit cards in that they allow you to make purchases through POS terminals. 

Your account balance will fluctuate, depending on how much you put in it and how much you spend. 

Also, it’s good to keep in mind that you usually have a 24-hour limit or ceiling placed on how much you can spend or withdraw within a given 24-hour cycle. 

Besides this, you’ll be able to use your Personal Identification Number (PIN), which is known only by you, when withdrawing at an ATM or when making a purchase. However, with the latter, it depends on the amount that’s being taken.

How to Use a Debit Card

You can use your card to make purchases just like you would with a credit card or a prepaid card. There’s one caveat though. You need to make sure that your payment does not exceed your account balance. 

If this happens, your transaction will probably be declined because of insufficient funds, or you might end up using your overdraft facility, which also incurs some additional costs. 

When it comes to transactions you can make using your debit card, there are two main types – withdrawals and general payments for purchases. Let’s look at each one in a bit more detail.

Withdrawals

Withdrawals at ATMs are still important as we’re not a fully cashless society yet and cash in some parts of Europe is still valuable. Italy is one example. 

When withdrawing cash at an ATM, you’ll be required to enter your PIN, which is known only to you. Also, you can withdraw only what’s been assigned as your maximum daily limit.

Keep in mind that if you withdraw from an ATM that’s outside of your bank’s network, you’ll incur some fees and charges. The same is true if you withdraw from an ATM in a foreign country. 

Payment Methods

Innovations over the past decades have made possible a variety of ways in which you can use your card for making purchases. 

There are four main payment methods you can make with your debit card:

• Magnetic stripe: each card comes  equipped with a magnetic strip that can be swiped along a POS terminal to make these so-called magstripe payments.  

• Contactless: to make contactless payments, you need to first ensure that your card has the contactless payment logo. Once you’re sure of this, simply hover your card over the POS device or hold it against the POS terminal for a couple of seconds until the payment has been processed. Keep in mind that there may be contactless payment limits in certain countries, such as the UK, where the maximum is £100 per transaction.

• Chip&PIN: in some cases, you’ll need to insert the card’s chip into the POS machine. This will trigger the transaction. In most Chip&PIN transactions, PIN entry is required. 

• Online: a more modern payment method that’s increasing in popularity is online payments. This entails entering your card details on a secure payment gateway page which, once payment is approved, enables you to complete your purchase. Even with online payments, debit cards now offer a range of payment options, such as direct debit, digital wallet payments or bank transfers. 

The above list shows the flexibility that consumers can enjoy when it comes to using their debit card to transfer funds. 

How Much Does a Debit Card Cost?

In short, getting a debit card will not cost you anything. You do, however, need to know that you’ll be using your own deposited funds in the card and that some fees can sneak in as well. 

Some of the most common fees associated with owning a debit card or making debit transactions include:

• ATM transaction fee: ATM transaction fees or “out-of-network” fees are accumulated when a cardholder withdraws cash from an ATM that’s not part of the bank that issued the debit card. 

• Insufficient funds fee: in case you decide to spend more than you have in your bank accounts you can be required to pay a charge for insufficient funds. 

• Overdraft fee: cardholders who have registered for overdraft protection can exceed their spending limit. However, they’ll be charged overdraft fees for each purchase. 

• Prepaid debit card fee: prepaid debit cards have a specific amount of funds and oftentimes, using them means additional fees. For example, prepaid debit cards like gift cards enable users to use a pre-loaded sum. Fees for using this type of debit card can be monthly maintenance fees, transaction fees, ATM fees, and others. 

• Replacement card fee: in case of debit card loss, theft, or damage, you may need to pay a replacement card fee to get a new card issued.

• Foreign transaction fee: you may also need to pay a fee if you choose to make a transaction in a foreign currency. 

Traditionally, the above-mentioned fees aren’t considered substantial or unaffordable for most users. Overall, being a debit card owner is usually associated with affordability and convenience.

Where Can You Get a Debit Card?

You can mainly get debit cards from traditional banks, financial institutions, credit unions or the so-called neo-banks. Neo-banks are simply banks without a physical location (online banks) which enable you to track your purchases and incoming payments through easy-to-use mobile apps. 

Regardless which financial service provider you choose, you will receive your bank card after opening a debit account. 

Debit Card’s Safety and Security

The PIN and CVV codes are two mechanisms that offer security for the cardholder, with the first designated for authenticating in-person payments and the second as a protection for digital transactions. 

Although ideally no one except you knows your PIN or CVV, it’s possible that your card falls into the wrong hands, whether you lose it or it’s stolen. In such cases, you need to contact your financial institution or bank immediately. While some will require that you call a help centre, others will require that you go to a physical branch as soon as possible to declare your card as lost or stolen. 

In the case of a stolen debit card, the sooner you report the card theft, the faster your bank can freeze it and ensure no one goes on a shopping spree with your hard-earned cash. Once your card expires, you could easily dispose of it or put it to good use.

What Is a Business Debit Card?

A business debit card is typically a plastic card that has almost all the characteristics of a basic one. However, it draws on funds already available to the business itself from sales and profits made. One benefit of using a business card is that the transaction fees are usually lower and there are no interest payments as one would typically have with a credit card.

Although most business cards are plastic, there are new innovations on the market – introducing extra levels of prestige to merchants through metal cards.

Differences Between Debit and Credit Cards

Although they look almost identical (especially given that a lot of bank debit cards are issued by credit card companies), there are some differences between debit and credit cards. 

While you can withdraw cash from both cards, credit card users will need to pay interest for this activity as they’re essentially borrowing from the bank rather than using existing funds in their bank accounts. Naturally, they’ll be expected to repay this amount later. 

Also, credit cards extend a line of credit, which is money that does not belong to you but to your bank. In other words, you’re relying on a revolving loan, where the credit card company bills you for the funds after they’ve paid the merchant. 

With a debit card, on the other hand, you pay or withdraw cash using funds that you actually possess. There’s no borrowing involved. 

Furthermore, credit card transactions can be more suitable for purchases with larger amounts, although this will be carried forward in the next monthly statement of account holders, in addition to credit card interest rates.

As debit cards don’t issue statements on money borrowed, you’ll only get your bank statement at the end of the month indicating your starting debit balance followed by the number of purchases and ATM withdrawals you made during the month. 

Another interesting point of differentiation between debit cards and credit cards is protection. According to law, cardholders cannot be held accountable for fraudulent purchases above a certain threshold on both debit and credit cards. This only applies to situations where the fraud has been adequately reported on time.

However, credit card companies frequently provide enhanced protection, with zero liability for cardholders. 

Also worth noting are the more lucrative rewards programs offered by credit card issuers who often provide better terms for things like travel points, cashback rewards, and others. 

Conclusion

Answering the question “what is a debit card?” may seem simple at first, but as you’ve seen, it’s not as straightforward as it looks. While a debit card may look almost exactly like a credit card, there are some significant differences. One of the major ones is that this card enables you to use funds you already have instead of borrowing a line of credit from a bank or a financial institution.

Once you apply for your card, however, which is a relatively straightforward process, you can take advantage of some real benefits such as paying no interest rates on credit borrowed, enjoying rewards, and more.

Use your debit card for a variety of purposes – withdraw cash at ATMs, swipe or tap it at a merchant to purchase items, or consider shopping with it online. These options have been created for your convenience!