Debit cards, like credit cards have an important place in your wallet, but there are some key differences you should be aware of. I’ve published a post on credit cards that you may want to review as well.
Debit cards don’t have the excitement of credit cards. You typically don’t get glamorous perks like airline miles, cashback or hotel stays for using a debit card. You also don’t get to spend someone else’s money and pay them back later (again, see the post on credit cards for more on this).
What is a Debit Card?
The debit card itself looks very similar to a credit card, but has one big visible difference. It will typically say DEBIT in big letters on the front of the card.
Your debit card is linked directly to a bank account that you own. When you use your card, it directly debits your account.
Debit cards are typically used in 2 ways
- ATMs – There are ATMs all over the world. It is a huge convenience to be able to put your card in an ATM in Boston, Birmingham or Beijing and get cash from your bank in Peoria, Illinois.
- Point of sale payments – You can use your Debit card at most merchants by inserting or tapping your card and entering your PIN. Yes, your debit card will most likely require you to remember and enter your PIN, unlike a credit card.
Let’s look a little deeper.
Using your Debit Card at an ATM
ATMs are a convenient way to get money out of your account. You can look up your account balance, and withdraw money from your account. Your bank will typically only let you withdraw the lesser of:
- Your current account balance
- Your daily withdrawal limit – most banks will limit the amount you can withdraw on any given day. Check with your bank. The ATM limit could be different than the limit you can withdraw at the teller.
While there are ATMs all over the world, there are different payment networks that process your withdrawal transactions. Your bank and the ATM need to be on the same network. ATMs typically support multiple networks so this isn’t often a problem in the US, but if you are traveling overseas, it’s a good idea to call your bank to check if it works with ATMs in the country you’re visiting.
ATM Fees – Watch Out
ATMs may charge fees. These fees can vary. You may be able to withdraw for free on your bank’s ATM, but pay $3.50 on an out of network ATM. On some ATMs, the fee could be even higher.
Here’s a place to do some shopping. There are banks that will refund each and every ATM fee. If you withdraw money from an out of network ATM twice a week, every week, you could be paying $300 or more each year in ATM fees. It might be time to find a bank that is willing to reimburse you for those fees. And remember, there is no rule that you can only have one bank. You may have a relationship with your bank and be very happy with their services. Why not open an account in a 2nd bank that reimburses ATM fees? Use that for ATM withdrawals and use your current bank for everything else? It’s likely that your employer will allow you to split your paycheck direct deposit so you can put some money in your current bank, and some in the new bank. Even if they don’t almost all banks will allow you to easily transfer money online free of charge.
International Debit Card Use
Let’s go back to the international use for a second. You’re heading to Beijing and you call your bank and are pleased to discover that your debit card will work on most ATMs in China. While you may pay a higher fee, this is a fantastic way to get cash in the local currency without stopping at a money exchange kiosk in the airport or other business that may make the job difficult, or may not treat you fairly on the exchange rate. While many businesses are reputable, some are not, and when you are away from home, it can be a tough time to try and sort this out.
Point of Sale Payments & Overdrafts
You can also use your debit card at the cash register at most merchants. You simply insert or tap your card and then enter your PIN. Once the payment is processed, your bank account is immediately debited for the amount of the transaction. Be aware of how your bank handles overdrafts. In some cases, if you charge an amount greater than your current balance, you may be charged an overdraft fee, and in addition, you may need to start paying interest on the amount by which you’ve overdrawn your account.
Fun fact: There is currently (January 2024) legislation being proposed to make overdraft fees less onerous. The rationale is that in most situations where customers exceed their account balances, they pay them off quickly. It’s reasonable for the bank to charge interest but the current fees and penalties are considered unfair by some. This is late breaking news and will likely go through many changes and challenges but something for us all to keep an eye on.
New potential legislation aside, overdraft fees and interest can throw your monthly budget into turmoil. Be sure you know how your debit card handles overdrafts, and check your balance before making point of sale debit card purchases to ensure you have the funds to cover the purchase. Note that this can get tricky if you have 2 or more people sharing the same account.
Point of Sale Example – Overdraft risk
My experience has been that my bank account is debited immediately on all charges. However, it is possible that there could be delays in processing. For example: My wife uses the card for a point of sale payment at 3:00 today. I check the account balance at 3:30 and see that I have $100. I make a point of sale purchase for $100. When my wife’s transaction processes later in the day, the account balance is 0 and the account goes into overdraft. Many banks will hold the account holder responsible for the overdraft. Other banks may allow you to designate another account (maybe a savings account) as a contingent account that will be debited to prevent the initial overdraft. Be sure to understand how your bank handles overdrafts and if you are prone to overdrafts, you may want to consider shopping for either a replacement bank or an additional bank to support your debit card purchasing.
Recap:
- Debit cards are a convenient way to access the money in your bank account. You will recognize the card because it will likely have the word DEBIT stamped on the front.
- Unlike a credit card, a debit card directly debits your account
- Using a debit card at an ATM is convenient, but make sure you understand the fees involved
- Using your debit card at a foreign ATM may be a good way to get local currency
- You can swipe a debit card and enter your PIN at most merchants
- You are responsible for overdrafts in your account. Make sure you understand your bank’s policies on overdraft fees and interest
- Your bank may offer the ability to use a secondary account to prevent you from overdraft in your primary account