What is a debit card?
A debit card is a bank card used to make purchases with the cash in the card holder’s deposit account. Debit cards grew out of check cards, a financial instrument meant to replace writing checks for purchases, and now can be used in lieu of cash at any retailer that accepts them. Unlike credit cards, which aren’t tied to cash deposits, a debit card can only be used if the account holder has money in the bank.
When someone opens up a checking account, she will receive a bank card that she can use to access the funds on the account. The bank card is almost always a debit card, and it can be used to make purchases as well as withdraw and deposit money at an ATM.
Debit cards look and function just like credit cards, except that credit cards are linked to a line of credit and must be paid off every month, whereas debit cards work the same as cash. Debit cards can be used for both online purchases and at traditional retailers, and money is deducted automatically at the point of sale.
Many banks protect debit card users from fraudulent charges by monitoring where the charges are coming from. Additionally, debit cards are secured with a personal identification number (PIN), which must be inputted at the ATM or, occasionally, when making a purchase.
Debit cards don’t typically offer rewards points the way credit cards do. That’s because there’s hardly an incentive for banks to get account holders to spend more of their cash — there are no interest charges like those associated with credit cards, and banks collect lower transaction fees from merchants. Although some retailers offer debit card holders the option to use their card as a credit card, from the customer’s perspective there is little if any difference.
When someone pays with a debit card, the charge is processed electronically. In the U.S., the major payment processors are Visa, Mastercard, American Express, and Discover, who contract with banks and credit unions that issue the card. In other countries, the payment processors issue the debit card directly, such as the case with UnionPay in China.
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Debit card example
Judith just deposited $1,000 in her bank account to open a new checking account. She gets a debit card from her bank, which she takes to a retailer to buy some new shoes. The cost is $100, and it’s automatically deducted from her account. Her account balance becomes $900.