Debit Card Definition, Fees, and How They Work

What Is a Debit Card?

A debit card is a payment card that deducts money directly from your checking account. Also called “check cards” or "bank cards," debit cards can be used to buy goods or services or to get cash from an ATM. Debit cards can help you reduce the need to carry cash, although using these cards can sometimes entail fees.

How a Debit Card Works

A debit card is a card linked to your checking account. It looks like a credit card, but it works differently. The amount of money you can spend on a debit card is determined by the amount of funds in your account, not by a credit limit such as credit cards carry. Your debit card may be connected electronically to your account, or it can be an offline card. Offline cards take longer to process transactions.

Unlike with a credit card, you don't go into debt when you use a debit card because you are using it to access funds you already have. You don't have to make monthly minimum payments on a debit card because there is no debt to repay.

You can use a debit card to get cash from an ATM, or you can make purchases with it like you make purchases with credit cards. With debit cards, you may need to enter your PIN (personal identification number), although many debit cards can be used to make purchases without a PIN.

Debit cards usually have daily purchase limits, meaning you can't spend more than a certain amount in one 24-hour period.

Debit cards draw the funds immediately from the affiliated account. So, your spending is limited to what’s available in your checking account, and the exact amount of money you have to spend will fluctuate along with your account balance.

Debit Card Fees

Generally, debit cards don't have annual membership fees or cash-advance charges, but there are other potential fees to consider.

ATM Transaction Fee

If you withdraw cash from an ATM that's not affiliated with the bank that issued your debit card, you may be charged an ATM transaction fee. These fees are also called "out-of-network" fees.

Insufficient Funds Fee

If you use the card to spend more than you have in your account, you can face an insufficient funds charge. These fees are also called non-sufficient funds (NSF) fees.

Overdraft Fee

If you've registered for overdraft protection and spend more than your limit, your purchase will go through, but you will incur overdraft fees.

Replacement Card Fee

You might incur a replacement card fee if your debit card is lost, damaged, or stolen and you need to order a new card.

Foreign Transaction Fee

If you use your debit card to make a purchase in a foreign currency, you could get charged a foreign transaction fee, such as 3% of the transaction amount.

Prepaid Debit Card Fees

A prepaid debit card, which has a set amount of money stored on it, may have similar fees. A prepaid debit card is like a gift card in that it allows you to spend a sum that's been loaded onto the card. Fees for prepaid debit cards can include monthly maintenance fees, transaction fees, ATM fees, reloading fees, balance inquiry fees, inactivity fees, paper statement fees, and foreign transaction fees.

Debit Card vs. Credit Card

Many bank debit cards are issued by credit card companies, so it may seem like there is little distinction between credit and debit cards. For example, a Mastercard debit card can look like a Mastercard credit card. However, they differ in many ways, from the way they finance a purchase to the amount of consumer protections they provide.

Here is a comparison of some of their main features in more detail.

Financing

Credit cards and debit cards work in fundamentally different ways in terms of how they use your money. Using a debit card to make a purchase is like writing a check or paying with cash. You're paying for the item with funds in your bank account, not with revolving credit.

When you use a credit card, you're essentially using a revolving loan. The credit card company pays the merchant, then bills you for the amount. You repay it when you get your monthly statement. If you don't repay the full amount, you pay interest on the remaining portion the following month.

Rewards

Some debit cards offer reward programs, similar to credit card rewards programs, such as 1% cash back on all purchases.

Protections

By law, you can't be held responsible for more than $50 of fraudulent purchases made on a debit or credit card, as long as you report the fraud in a timely manner. However, credit card companies often extend their protections to provide zero liability to cardholders.

ATM Use

You can get cash with both debit and credit cards. But when you get cash using a credit card, you're borrowing money with a "cash advance." If you use your credit card for cash, you may pay interest on the funds starting right when you withdraw them. You may also pay a transaction fee and owe a higher interest rate than you would on purchases.

You don't carry a balance on a debit card because each time you use it, you're paying with money that already belongs to you. So there are no interest charges.

Pros Explained

• Safer than cash: Debits are considerably safer than cash. Transactions made with a debit cards appear on the account holder’s monthly statement, making it easy to see where the money went. While lost or stolen cash is gone forever, a lost or stolen debit card can be reported to the bank, which can deactivate the card, remove any fraudulent transactions from the cardholder’s account, and issue a new card.
• Doesn't incur debt: With debit cards, you are effectively making purchases in cash—with money you already have, as opposed to money borrowed on credit. So, you won't go into debt using a debit card. (However, some overdraft protection plans allow you to spend past your limit, but you must repay the balance quickly and you will likely incur a fee.)
• Easier qualifications than credit cards: Debit cards are easier to get if you have poor credit. If you have a checking account, you can get a debit card. You don't have to apply and get approved for debit cards like you do with credit cards.
  

Cons Explained

• Limits expenditures to cash in bank and/or a daily amount: When you use a debit card, you can only spend up to the amount of money you already have. If you need to finance a purchase to pay it off over time, you can't use a debit card for that type of purchase.
• Could incur fees: Using a debit card can entail fees, including overdraft fees when you withdraw more than the amount you have in your account, and ATM fees when you use an ATM outside your bank's network.
• Fewer perks than credit cards: Although some debit cards have modest rewards programs, they generally don't offer as many perks as credit cards. Rewards programs that offer cash back and travel points are more common among credit cards.
• Fewer protections than credit cards: Debit cards may have fewer protections against fraud than credit cards. Credit card companies are more likely to reimburse you for all purchases made as a result of fraud. By law you can't be held responsible for more than $50 in fraudulent purchases made on a debit or credit card, if they are reported promptly.

The Bottom Line

A debit card is a card issued by a bank or credit union to checking account holders that is used to access funds in the account. You can use a debit card to access cash from an ATM or to buy goods or services. Unlike with credit cards, you can't go into debt using debit cards (except perhaps for small negative balances that might be incurred if you have overdraft protection).

If you are considering getting a debit card, compare the fees and potential perks of accounts from different banks.