A debit cardA card used for purchases that is issued by the consumer’s bank. Funds are deducted from the consumer’s checking account and transferred electronically to the merchant’s bank account when a purchase is made. looks and feels like a credit cardA plastic card with a magnetic stripe on one side that can be used to purchase goods and services. The issuing company records the purchases, bills the purchaser, receives payment, and subsequently settles the purchaser’s debts with the providers of goods and services. Some credit cards offer cash advances to its holders. but works more like cash. Unlike typical credit cards, when you use your debit card for purchases, payment is deducted directly from your checking accountAn account that allows the customer to write checks on the money in the account. or savings accountAn account at a financial institution that earns interest and allows regular deposits and withdrawals. The minimum required deposit, fees charged, and interest rate paid vary among providers. .

When you swipe your debit card at a retail store, your bank is able to verify whether or not the funds are available and will either approve or deny the transaction. Your account is then updated immediately. Most checking accounts come with free debit cards, which allow you to make purchases, withdraw cash from ATMs (automated teller machines), check your balance, deposit money and transfer money between accounts.

Why do people use debit cards?

Not only can debit cards be more convenient than carrying around large amounts of cash or checkbooks, it is a good way to pay for purchases without having to pay interestAn amount of money paid for using funds over a period of time, generally an annual percentage rate. Bank interest is both an amount paid to depositors of funds and a finance charge for money that is borrowed. The price that someone pays for the temporary use of someone else’s funds. Interest is also a compensation that someone receives for temporarily giving up the ability to spend money. , as you would with an outstanding credit card balance. You can also use your debit card to get cash back when you make purchases at a store, saving an additional trip to the ATM.

What is the benefit of debit cards?

Debit cards are often used for smaller, everyday type purchases, like those at the supermarket, drug store, or dry cleaners. With debit cards, you can likely avoid some of the possible disadvantages of cash and checks:

  • Fewer trips to the ATM,
  • No need to provide identification at the checkout counter,
  • No risk of misplacing or losing the dollar bills in your pocket.

Debit cards are easy to use and each transaction is detailed on your monthly bank statementA printed or online statement, usually available as a pdf, that provides the depositor with a record of deposits, checks, ATM transactions, and electronic fund transfers made to an account over a certain period of time. , allowing you to monitor where and when you've spent your money. Some debit cards come with rewards and other incentives for using them. But make sure you study the fine print. As with other financial products, rewards-linked debit cards are designed to get you to use a certain product or service, and may charge fees or offer unrealistic rewards that are difficult to earn.

In general, with a debit card you can gain more control over your finances. The ability to track your purchasing habits makes the debit card a helpful budgeting tool, allowing you project future expenses or highlight spending habits you would like to change.

Important things to keep in mind to avoid fees

Consider the following scenario: Suppose you forget that you have only $50 in your bank account and you want to use your debit card to buy a $100 item. Depending on the terms of your account or the rules of the ATM card network, the bank might approve the $100 purchase as a convenience, but it also might assess an overdraft fee, (charges imposed on you the customer when you spend more than you have in your checking account), for that overspending of checking account funds (and any future overdrafts), until you are able to deposit enough money back into your checking account to cover your purchases. It is, therefore, important to keep an eye on your spending and the available balance in your bank account. Also, you could be charged a fee if you use your ATM card at a machine that is not affiliated with your bankAn institution, chartered by the state or federal government, that takes deposits and provides credit and other financial services. or financial institutionBanks (sometimes called commercial banks), credit unions, savings associations, savings and loans. . Make sure to read the bank disclosure regarding possible fees associated with your debit card. In some cases, it can be difficult to stop payment or obtain a refund on a purchase with your debit card. Remember, the funds have already been deducted from your account so you do not have the ability to withhold payment if the merchant did not deliver what was promised.

Federal protections for consumers who use debit cards

The federal Electronic Fund Transfer Act (EFTA) was created to protect consumers from errors, loss or theft of your debit card. However, many banks don’t hold consumers responsible for unauthorized transactions if you notify the bank in a timely fashion.

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