It wasn’t that long ago that a person would actually go to their bank and take out cash from their accounts. But during the 1980’s that all changed with the introduction of the automated teller machine, or ATM. Once the ATM came into being, when you opened your bank account, the bank issued a plastic card that you could use at an ATM to withdraw cash. Pretty simple, right?
By the 1990’s, ATM cards issued by the banks began to carry the Visa and MasterCard logos, allowing bank customers to use their ATM card anywhere the credit cards were accepted. Because of this, consumers could keep less cash on them, and there was no need to be concerned with piling up debt on your credit card.
Because this new card worked a lot like writing a check, it was known early on as a “check card.” But because it pulls – or debits – the money from a bank account so quickly, the name debit card soon took hold.
The banks were very excited, because every time someone uses a debit card to pay for something, they make money, and Visa and MasterCard also do. This is why they run so many ads promoting debit cards, even though it’s the bank that creates a relationship with the customer.
Do you need a debit card?
In this day and age, it’s likely that you already have a debit card, as most of us do, and for the most part, they are useful.
- It is tougher to spend beyond what you have, as long as you don’t have overdraft coverage.
- Debit cards can help you budget. If you use one for all your purchases, you can quickly examine your statements and get a good sense of where and how you spend your money.
- Some banks and third-party services allow you to request text messages containing your current balance, which can be helpful if you are making a big purchase.
So why isn’t everyone choosing to use a debit card rather than a credit card?
Credit cards offer better rewards than your debit card. Some debit cards have a cashback offer or enrollment in cash contests, but almost always they have restrictions and low caps. Credit card issuers tend to be more generous because they make far more money thanks to the interest people pay on their purchases if they don’t pay off their balance at the end of the month. Financial institutions make a lot less money from debit cards.
Occasionally, you might want to make a large purchase that would not be covered by your available funds in your bank account. You can put something on one and then it is up to 45 days until the bill comes due. When you use a debit card, the money comes directly out of your account immediately.
Security issues around debit cards still make many people uncomfortable. If your debit card gets stolen or somehow compromised, the money the thief spends comes directly out of your account. With a credit card, as long as you notice the fraudulent charges, you can call the credit card company, file a dispute, and solve this problem for yourself.
With a debit card, the money’s usually out of your bank account by the time you realize a problem exists. When you dispute the charge, generally you will be able to get it back within a few weeks, but if you are broke, this won’t be helpful.
Should you use debit or credit cards in stores?
When you pull your plastic out to make a purchase, clerks often don’t know whether you are using a credit card or debit card, so they will ask you. If it’s a credit card, you say credit and sign for the purchase. But if you are using a debit card, the right answer to the question may be counterintuitive — we advise selecting credit.
To process your transaction credit and debit cards use different networks. If you say “credit,” you will have to sign for your purchase, which is then transmitted over Visa’s or MasterCard’s network, though the money will still come out of your bank account.
If you say “debit,” you will have to enter your PIN into the keypad. Once you punch in the number, the money comes out of your account.
There are some good reasons for using the credit network when you make a purchase with your debit card:
- Some banks charge a $1 or even more for using your PIN at the register
- If your debit card earns rewards, you might only get them if you sign for purchases
- Visa and MasterCard will ensure purchases that you sign for like they would a credit card purchase, but not so if you enter your PIN for your debit card
What if your debit card gets stolen?
Keep track of your balance, and if there is any odd activity, report it as soon as you notice it.
If someone steals your debit card and are able to use it, your money is protected. The law says that the theft can’t cost you any more than $50, as long as you notice it within the first 48 hours, and $500 if you don’t notice it for up to 2 months. After that, you could lose everything in your account.
That troubles many people, so Visa and MasterCard promise zero liability. That means if a thief goes after your account and signs for purchases, you will not be held responsible for anything.
The larger problem is that the money stays tied up while the bank investigates, which can take some time. Meanwhile, other checks or auto payments could bounce, and that could have a negative impact on your credit report.
Visa or MasterCard are not mandatory
If you are not going to use your debit card for purchases, ask for just an ATM card without a Visa or MasterCard logo. This is fine if you don’t want to use your debit card for anything but the ATM.
The banks do not want you to have this kind of card because they make more money when you sign for purchases. Thus, when you open a new account, they automatically will send you an ATM debit that has the Visa or MasterCard functionality, hoping that you will eventually use it.
Credit and debit cards’ rewards programs
Some debit cards, just like credit cards, reward your spending. You might get frequent-flier miles, free travel, merchandise, or cashback, although you may need to spend $25,000 – $50,000 if you want to earn a plane ticket, but it depends on the program.
The most profitable debit-card rewards programs are still worth much less than even the stingiest credit card reward program. Debit cards will always give away far less because people with debit cards aren’t generating anywhere near the income for them as the people who are paying off $10,000 of debt at 20% annual interest.
Do you need overdraft protection?
However, banks are quick to recognize that they can make more money from your debit transactions when they put overdraft protection on your account automatically. That way, if you put $100 on a debit card but only have a $50 balance in the bank, your purchase could still go through but you will be hit with an overdraft fee, plus interest on the $50 that went into your overdraft.
Some people prefer to have overdraft protection, because it can prevent you from accidentally bouncing a check or overdrawing your account when your paycheck does not come through on time, resulting in you being short on funds. If you prefer not to have overdraft protection, you can ask your bank to turn it off.
Keep in mind that if you bounce a bunch of checks, this will go down on your permanent record at the bank, which could make it impossible to get another regular checking account for years afterwards.
Your debit card & your credit score
If you have overdraft protection, and you run up a large balance and then don’t pay, it could negatively affect your credit score.
If you don’t keep a lot of money in your checking account, you should avoid using debit cards at gas stations, hotels, rental car outlets, etc. When you use a debit card in these kinds of places, they will often place a hold on a portion of your funds for many times more than what you spend.
It is much better to use a credit card for these kinds of purchases. It’s wise for you to use a credit card at unfamiliar retailers, so that should there be a credit card dispute, the process is more consumer-friendly. After all, you won’t be fighting to get money back that you already paid, as long as you dispute the charge prior to paying the bill.
Still looking for more? Feel free to check out our comprehensive personal finance guide to learn more about managing your budget and staying financially healthy.