What Is a Debit Card?

Cash and checks are becoming a thing of the past, and debit cards are largely what's replacing them. Understanding what is a debit card and the key differences between a debit card vs. credit card is crucial to navigating today's financial landscape.

What is a debit card?

A debit card is a card payment method, similar to a credit card. Your debit card pays for purchases by immediately withdrawing money from your checking account. The best checking accounts charge no fees for this service.

The most important difference to understand between a debit card vs. a credit card is that when you use a credit card, you borrow money which you pay back later rather than using money you already have in your account. You can also use a debit card to withdraw cash from your bank account at an ATM. Debit cards are issued by most financial institutions that offer checking and/or savings accounts.

Debit card pros and cons

Debit cards are a quick and convenient way to pay for everyday purchases. In addition to asking "What is a debit card?" you should also consider the pros and cons of using a debit card vs. credit card.

Pros

• You don't need good credit, or any credit at all, to get a debit card.
• You don't run the risk of falling into debt with a debit card. Each purchase is immediately paid in full through your checking account.
• Most debit cards are low-cost or free.

Cons

• Debit cards don't help you build credit.
• Debit cards don't offer as much fraud protection as credit cards.
• If you ever need to pay off a purchase over time, you don't have that option with a debit card. You always have to pay for your purchases right away.
• While most debit cards are low-cost or free, you might still get charged an overdraft fee if you charge more to your card than you have in your checking account.

Sadly, there are still barriers to opening a bank account, and therefore a debit card -- particularly for immigrants, the homeless population, and those living in poverty. Not everyone can get a debit card. Hopefully, in the future, some of these barriers will be removed.

What is the difference between a debit card and a credit card?

Debit cards use money you already have to pay for purchases -- credit cards borrow money and pay it back later. That's the core of what's different about a debit card vs. credit card.

Credit cards can be convenient when you don't have enough money saved up to pay for a purchase all at once. However, failing to pay off your credit card balance in full each month leads to expensive interest charges.

With a debit card, you're paying with your own money. So you don't need to worry about interest charges.

How do debit cards work?

When you pay with a debit card, a payment processor (like Visa or Mastercard) moves money from your checking account to the merchant (whoever you're paying). This is different from paying with a credit card. When you use a credit card, the payment processor transfers money from the card issuer to the merchant. Then, you pay the card issuer back over time.

In comparing your debit card vs. credit card, you might notice that your debit card has the Visa or Mastercard logo on the front, just like your credit card -- but remember the answer to the question of what is a debit card? With a debit card, you pay for your purchases upfront out of your bank account.

For example, Discover has many cash back credit cards. But there's also a Discover cashback debit card, which offers cashback rewards without increasing your debt.

Advantages of credit cards

Understanding the advantages of a debit card vs. credit card will help you know what a debit card is. There are a few reasons you might want to use credit cards over debit cards. While borrowing money can be risky, the best credit cards are worth it if you make sure to pay off your bill each month and avoid interest fees:

• You can build credit: Using a credit card regularly (and paying it off on time) is one of the best ways to increase your credit score. A high credit score is important for scoring a great mortgage, renting an apartment easily, or even getting approved for a car loan.
• You can earn rewards: Additionally, many credit cards come with rewards. Some offer cash back, while others earn travel points.
• You can protect your purchases: Certain credit cards have useful benefits, such as purchase protection or trip insurance. Purchase protection is helpful if you plan to buy something particularly valuable. With some policies, your credit card issuer will refund the price of certain items if they are stolen or damaged (if you paid for them with your credit card).
• You are safe from fraud: Most credit cards also have a $0 liability policy, which means that you're not liable for any fraudulent charges found on your statement. With a debit card, you're liable for up to $50 worth of fraudulent charges if they're reported within two business days of seeing the charges. You're liable for up to $500 if reported later than that.

Want to learn more about fraud? Check out The Ascent's guide to mortgage fraud.

Debit card terminology

In understanding what is a debit card, it can be helpful to define some key terminology. These are some terms you should be aware of when using a debit card.

Checking account: A checking account is a bank account that's used for everyday needs, such as receiving income and making purchases. To answer the question of what is a debit card, you have to understand that a debit card is typically linked to a checking account.

Savings account: A savings account is meant to be used for money you plan to save rather than money you plan to access regularly. While savings accounts still give you immediate access to your funds, Federal Reserve Regulation D limits savings accounts to six "convenient" transactions per month.

Personal identification number (PIN): A PIN is a confidential code you set up upon opening a debit card that provides an extra layer of security when processing transactions.

Debit card number: Your debit card number is the 16-digit number found on the front of your debit card.

Account number: Your account number is a unique number associated with your bank account, and is typically 10 to 12 digits long.

Routing number: Your routing number is a nine-digit number associated with your financial institution. You can find this number on the bottom of your checks, or by contacting your financial institution.

Card verification value (CVV): This is a three-digit code (four digits in the case of American Express cards) printed on the back of your debit card used to provide additional security for online purchases.

Automated teller machine (ATM): An ATM is a machine where you can use your debit card and its associated PIN to withdraw cash from a linked bank account.

In-network and out-of-network ATM: Financial institutions have their own networks of ATMs. Using an in-network ATM is often free. Out-of-network ATMs are those operated by other financial institutions. You might be charged an ATM fee by the other financial institution, your own financial institution -- or both -- for using an out-of-network ATM.

Direct deposit: Direct deposit is when you set up incoming payments, whether it's paychecks from your job or other forms of income, to be deposited directly into your checking account (rather than sent in the form of a check).

Overdraft: When you overdraft your bank account, you've used your debit card to pay for a purchase that costs more than the money you currently have in your account. Sometimes these transactions will be denied. If they go through, it's called an overdraft. You'll have to pay back the overdrafted funds and any associated fees immediately.

Overdraft protection: Some bank accounts offer overdraft protection. This is a service that allows you to connect a back-up source of funds such as another checking account, a savings account, or a credit card. In the event that you overdraft your primary checking account, the additional funds will be pulled from your back-up account.

Overdraft fee: Most banks charge an overdraft fee when you charge more to your account than what's available. The average overdraft fee is $35.

Foreign transaction fee: Some debit cards charge a fee for every purchase you make in a foreign country. The typical foreign transaction fee is 3%, meaning you're charged a $3.00 fee for every $100 you spend while abroad.

Types of debit cards

There are a few different types of debit cards, and learning about them can help you understand what is a debit card. Read up to decide which one is best for you.

• Debit cards: Also known as a check card, this is the most common type. They're typically backed by a financial institution, such as a traditional bank, online bank, or credit union. Additionally, they're often connected to a payment processor, such as Visa or Mastercard. These cards are linked to the cardholder's checking account. Funds to cover transactions are transferred from that account. These cards can be used to make purchases with a merchant or to withdraw cash from an ATM.
• EMV cards: An EMV card is a type of debit card with an EMV chip. The chip provides an added layer of security. Each time a transaction is processed, the chip creates a unique transaction code that can't be used again. This makes the data on EMV cards much harder to steal than the data on a traditional debit card that uses a magnetic strip.
• ATM cards: An ATM card is a card that can be used at an ATM to withdraw cash. Funds are withdrawn from a linked checking or savings account. While regular debit cards can be used at an ATM and to make purchases, ATM-only cards cannot be used to make purchases.
• Prepaid debit cards: These cards function similarly to other debit cards, but have a different source of funds. Instead of linking a bank account, you load money onto the card with cash, a check, a bank account transfer, direct deposit, or sometimes a credit card. They're useful for consumers who don't have a bank account. Be careful: These cards sometimes charge monthly fees and reload fees.

History of debit cards

Knowing the history of debit cards might help you develop a better understanding of what is a debit card. Until the last few decades, cash and check were the most popular payment methods in the United States. Debit cards were introduced in the 1980s as ATM cards. At that time, most consumers used them only to withdraw cash from their bank accounts at an ATM rather than to make purchases.

It wasn't until the mid to late 1980s that merchants started to acquire point-of-sales (POS) systems that accepted debit cards as a form of payment. They weren't widespread as a form of payment for purchases until the early 1990s, when debit cards finally received Visa and Mastercard logos. This development allowed consumers to use Visa or Mastercard-branded debit cards at any merchant that accepted Visa and Mastercard credit cards. By the late 1990s, debit card purchases outnumbered check purchases.

Debit cards are one of the most widespread and convenient forms of payment. While they don't build credit or offer generous cash back or travel rewards, and they aren't quite as safe as credit cards, paying with your own money can provide a safety net to avoid debt.

Still have questions?

Here are some other questions we've answered:

• What is a credit card?
• Should I get a credit card or a debit card?
• How much should I keep in my checking account?