What is a Debit Card? Understanding the Basics, Benefits, and How it Differs from a Credit Card

When I was a kid, I once heard a friend’s dad tell a joke that was so bad it stuck with me for years. It went something like this:

Q: What does a broke frog say?
A: Debit, Debit…

It wasn’t until I grew up and secured my first debit card that I understood why the frog was low on funds. Money was being withdrawn (debited) from its bank account for unknown reasons. I still remember that joke sometimes when I take out my debit card to pay for something — and trust me, I wish I didn’t.

Debit cards are account-linked cards that are accepted on credit card networks. They allow you to use the money in your checking account to make online bill payments, in-person purchases, and withdraw cash from an ATM, but they won’t help you build credit.

Many people (not frogs) enjoy using debit cards because they are basically your checking account in the form of a card. That means they can only spend the money they have — without overextending themselves financially. They function similarly to credit cards, making them easy to use for everyday transactions. 

But the most significant difference is that, with a debit card, you can’t borrow money. That also means you can’t build credit by using one. But on the bright side, you also can’t rack up a lot of credit card debt.

While a debit card may not help you build credit, it is still a worthwhile financial tool. I can teach you what you need to know about debit cards and their advantages, but one thing I can’t promise is that you won’t get that terrible frog joke stuck in your head.  

We use our debit cards to purchase everything from online books to groceries at the local supermarket. But how does a debit card actually work? I’ll walk you through the details (and I’ll try to keep it interesting). 

Processing Transactions

Whenever you shop, you’ll usually encounter a Point-of-Sale (POS) system. If you’ve ever wondered what these systems do, they help merchants process payments and log transactions. 

Most POS systems (not a great shorthand, I admit) will have a card reader attached to them. Here is where your debit card comes into play and the transaction begins. 

Once you run your card through the reader, it may ask for a personal identification number (PIN) and will give you one of two messages, “approved” or “declined.” If your card is approved, the amount paid will be deducted directly from your checking account. 

But what happens between these two points? Although it is invisible to the human eye, a lot goes on behind the scenes to process your payments. 

Communication between the POS and your bank will begin. Since the POS automatically connects with your bank, it verifies that you have enough funds before confirming a payment. 

This way, banks can contact you to authorize a payment for security reasons if they believe someone is using your card unlawfully. A debit card can be denied for various reasons, including security purposes, insufficient funds, and using incorrect PINs.

Of course, this process also occurs online. The POS process is similar, but instead of using a card reader, you enter your card details at an online store and complete a payment transaction. 

Once your payment is approved, it will be either processed immediately or within a couple of days. You can track your transactions through your bank’s online platform or mobile app to review which transactions are still pending. 

The settlement phase is the last phase your transaction goes through before completion. After your transaction has been approved and authorized, the funds are transferred from your account to the merchant’s account. 

Settlement is often behind longer processing times. It usually occurs within a few business days, depending on the processing times of the bank involved. Longer processing times can also be attributed to security checks and transaction verification. 

Thanks to POSes and streamlined debit processing, we can use our debit cards without complication and with more flexibility and freedom.  

Link to Bank Accounts

Remember those little portable TVs? They allowed you to take your favorite shows anywhere by using an antenna to link your broadcast networks. Although they were a little clunky, these miniature TVs were definitely easier to travel with than the real deal.

What makes debit cards so useful is also their portability and something else: their direct link to your bank account. Owning a debit card is like carrying around a portable version of your checking account wherever you go, replacing the need to draw cash from ATMs. 

Most debit cards are electronically connected to their respective bank accounts. But banks also offer offline cards. Since offline cards are connected digitally, it can take longer to process transactions with them. 

Owning a debit card is like carrying around a portable version of your checking account wherever you go, replacing the need to draw cash from ATMs. 

Debit cards allow cardholders to avoid using cash and instead leverage its functionality to make purchases. Debit cards carry the amount of money you have within your checking account. So you are essentially using the money you have to spend. 

Although debit cards don’t lead to serious debt, your purchases can trigger a deficit called an overdraft. This occurs when merchants approve purchases that take you over the balance in your checking account. Worse still, overdrafts can come with fees.

Thankfully, many banks offer overdraft protection. This service is an agreement by your bank to cover overdrafts in your account. The bank will automatically transfer funds from a linked backup account to your account when you overdraw to clear a transaction. 

Some things to know about overdraft protection include:

• It is an optional service that may require paying a fee on your part to employ. 
• Funds to cover the overdraft can come from multiple sources, including a linked savings account, another eligible checking account, a credit card, or a line of credit.
• It helps you avoid declined transactions, overdraft fees, and overages, which can be sent to collections and affect your credit score if you don’t pay them immediately. 

Another thing to know about debit cards is that some can work on both credit and debit networks. Dual-network debit cards allow your transactions to be routed through either network. 

Typical Security Features

Now, let’s talk security, which I think is the most important topic when it comes to my money. Debit cards include various forms of security features, with physical and electronic methods. 

First up is chip technology. You may remember when you first received your chip-enabled debit card in the mail. That’s because banks didn’t start using chip technology until late 2015. 

Banks and other financial institutions began to embed small computer chips into cards to bolster security and protection against fraud and theft. Traditional magnetic-strip cards were often susceptible to counterfeiting due to card cloning and skimming devices, which thieves use to capture and duplicate card data and PIN entries. 

Chip-enabled cards solve the issues magnetic-strip cards face by generating a unique one-time-use code for every transaction. Combined with PIN protection, these codes make it more difficult for thieves to steal because they would need the code and your PIN to make a fraudulent purchase. 

Since we’re on the topic of PIN protection, let me explain its role in securing debit card transactions. PIN stands for “Personal Identification Number.” You create this four- to six-digit code when you sign up for your debit card. Essentially, a PIN helps protect you and your bank account by verifying your identity during purchases. 

PINs are still widely used. However, the introduction of contactless technology is slowly making the use of PIN numbers obsolete. Most merchants don’t require a PIN for purchases made with contactless cards unless the transaction amount surpasses a certain limit.

Banks also help protect cardholders by monitoring for fraudulent activity on debit cards. They use a variety of data, including customer and device information, to create algorithms that can detect variances or patterns indicative of fraud. 

For example, if you live in California, and your bank has your personal address on file, the bank will understand that most of your transactions will occur within the proximity of where you live. 

But if transactions in New York start appearing suddenly, the bank will detect this and contact you to verify whether you’re visiting the Statue of Liberty or your card information has been stolen. 

At first glance, debit and credit cards may look like one and the same. They’re both small, handy, and useful for making purchases. 

Although debit cards may take on the shape of a credit card, these two types of payment cards differ on a grand scale. Below, I’ll dive deeper into what makes them so different. 

Spending and Interest

When purchasing with a debit card, your funds are immediately deducted from your checking account once a transaction is approved. That is because your debit card is directly linked to your checking account. 

So what does that mean for your spending?

Unlike credit cards, debit cards do not allow borrowing. You can only use the funds that are within your bank account and can’t access money from anywhere else to make purchases. 

There are highlights about the debit card setup that credit cards don’t have. Debit cards allow you to avoid interest charges, better control spending, and bypass debt. 

You don’t have to worry about maxing out your card and the negatives that follow, such as credit score dips and interest charges.

Another thing to keep in mind about debit card purchases is spending limits. Most banks impose daily spending limits on debit card transactions to protect your card from fraud and unauthorized spending. This limit typically ranges from $400 to $5,000. 

Banks can also limit how many transactions and ATM withdrawals you make per day. You can contact your bank or credit union to find out your card’s spending limit.

Credit Score Impact

Credit building involves making payments that are reported to credit bureaus. These payments are then considered by credit reporting agencies when calculating your credit score and developing your credit history. 

In the case of debit cards, their use won’t entirely affect your credit history. Debit cards don’t allow you to spend borrowed money like credit cards, so payments made with them won’t be reported to credit bureaus and won’t impact your credit score.

If debit cards are your primary vehicle for spending, don’t worry. There are other ways to build credit that don’t involve using a credit card, including these:

• An auto loan
• Student loans
• A mortgage loan
• Reporting rent and utility bills

All of these credit-building opportunities are automatically reported by your lender or can be reported by you using a reporting service to credit bureaus. 

Although debit card use does not build your credit score in any way, there is a way it can affect your credit score that most people don’t think about. How? Well, it has to do with overdrafting. 

If you overdraft using your debit card, you must pay back the overage immediately or face the possibility of your account going to collections, which can affect your credit history. 

Fees and Charges

Of course, we have to cover overdraft fees — one of the most impactful attributes of debit cards. Overdraft fees are charges you may potentially incur when you overdraw your bank account while using a debit card.

Banks typically charge an overdraft fee between $25 and $35 per incident — but you do have to opt-in for them to provide overdraft coverage. If not, your debit card purchases will be denied for lack of funds. 

While there is currently no federal law that specifies a maximum limit for overdraft fees, proposed legislation would cap the fees at between $3 and $14. As of now, it’s up to the bank to decide its policy and how much it can charge per incident. 

Foreign transaction fees are another gotcha to watch out for while using a debit card. This type of fee is incurred when shopping abroad. Most often, the charge is 1% to 3% of the transaction amount. 

You should also consider ATM fees. Debit cards and ATMs go hand in hand. If you need physical cash quickly, you can use an ATM to withdraw your own money with a debit card. However, you’ll have to pay a usage fee, which usually amounts to $2 to $3 per transaction. 

Using a debit card is almost like using cash. It replaces the need to carry cash and allows you to access your money in the form of a small, handy card you can take anywhere. 

But that isn’t its only benefit, and these nifty cards also have drawbacks when compared to other card types. I’ll explain below. 

Benefits

• Budgeting and Spending Control: Debit cards are basically an extension of your checking account. They provide you access to your hard-earned cash electronically. That means you can only use and withdraw money you have in your account, making it impossible for you to accrue debt. This way, you can also stay on budget.
• Security and Fraud Protection: You receive excellent security and fraud protection with debit cards. Most banks monitor for fraudulent activity and alert you so you can report it and avoid being liable for unauthorized charges. Debit cards also have built-in protection with chip or contactless technology embedded in the card. 
• Accessibility and Convenience: Debit cards don’t require credit checks. Since they aren’t credit-building tools, you can forgo the credit approval process and easily access a debit card to pay for purchases and expenses. They are easy to obtain, use, and manage. 

Drawbacks

• Lack of Credit Building: Debit cards don’t come with many credit-building opportunities. When you make a purchase with a debit card, your payments are not reported to credit bureaus, which is the only avenue to credit building. 
• Potential for Overdrafts: Overspending isn’t only prone to credit card use. Though debit cards help you avoid debt, you can still overdraw your funds with them. If you spend more than what you have in your checking account, you may have to pay an overdraft fee. These costly fees can add up and cause your account to go to collections if the overages are not paid immediately.
• Limited or No Rewards Programs: Unlike credit cards, most debit cards don’t include rewards programs. If they do, the rewards are usually very limited cash back benefits.

Debit cards may not help you build credit, but they offer tons of benefits that can help you along your financial journey. 

Debit cards are resourceful tools to have. Unlike credit cards, they can enable you to avoid debt and manage your spending, but they won’t help you build your credit score. 

Combined with other financial habits, including account monitoring and setting spending limits, a debit card could be a tool to put you on the path to a bright financial future.

 Just don’t spend all of your money and overextend yourself because you could incur overdraft fees. Then you’d be as broke as… that frog, I guess.