What Is a Debit Card and How Does It Work?

What Is a Debit Card and How Does It Work? article image.

A debit card is a type of payment card that's linked to an account in the cardholder's name. It allows the user to make purchases with money they have in their account or access the cash via a withdrawal. Here's what you need to know about how debit cards work.

How Do Debit Cards Work?

Debit cards work similarly to checks in that they allow bank account holders to access the money they have in their account. You can use a debit card to make purchases online or in-person, though in-person transactions often require that you enter your personal identification number (PIN). Debit cards are typically connected to a checking account, money market account or prepaid debit account.

You can pay bills with your debit card, and you may be able to connect it to peer-to-peer payment services to transfer money to friends and family members.

Debit cards can also be used to access the cash you have in your bank account through an ATM. Out-of-network ATM transactions may be subject to fees from your bank as well as the owner of the ATM, but you may be able to avoid fees by using an ATM that's in your bank's or credit union's network.

Prepaid debit cards work like traditional debit cards, except they're linked to prepaid card accounts rather than a checking or money market account. They allow you to access the money that you've loaded onto the card via direct deposit, bank transfer, mobile checks, cash loads and more. Depending on the card and the type of reload, though, you may be subject to fees.

Can You Build Credit With a Debit Card?

Unlike credit cards, debit cards, including prepaid cards, don't normally help you build your credit history. This is because debit cards typically only allow you to access the money you already have. There's no line of credit that you're using to borrow money, so there's no credit relationship.

And while you can overdraw your account using your debit card with some banks and credit unions, the financial institutions don't report that debt to the consumer credit reporting agencies. Instead, they typically charge an overdraft fee and require you to put enough cash in your account to bring it back above $0.

There are debit cards out there that can help you build credit, such as the Extra card, but these are rare. If your goal is to establish a credit history, you might want to explore more conventional options such as getting a secured credit card or becoming an authorized user on someone else's credit card account.

How Debit Card Fraud Protection Works

If someone steals your debit card and uses it to make unauthorized purchases, there are limits to how much you're liable for the fraudulent transactions.

The Electronic Funds Transfer Act limits your losses on both debit and ATM cards based on when you report the loss.

Debit Card Fraud Protection
When You Report the ChargesYour Maximum Liability
Before unauthorized charges are made$0
Within two business days after you learn about the loss or theft$50
More than two business days after you learn about the loss or theft, but fewer than 60 calendar days after your statement is sent to you$500
More than 60 calendar days after your statement is sent to youAll the money taken from your account, and possibly more

Keep in mind, though, that these are maximum losses. If your card is compromised and you don't notice it in time for fraud protection to kick in, you'll only owe up to the amount that was actually spent. That's why it's important to make sure you keep track of your account transactions regularly and review your statements every month for anything you don't recognize.

If your card is lost or stolen, contact your card issuer and let them know as soon as possible. You might also want to alert your local law enforcement agency.

Debit Cards vs. Credit Cards

Debit cards and credit cards function differently, and it may be worth it to use both in your regular everyday spending. Understanding how they both work can help you make better decisions about what to carry and when to use each type of card:

  • Credit cards offer more security. While the maximum you may lose on fraudulent debit card purchases is the full amount that was stolen, federal law caps the maximum loss on unauthorized credit card purchases at $50. In many cases, card payment networks like Visa and Mastercard take this one step further and have zero-liability fraud protection, so you don't have to worry about losing anything. Furthermore, if someone steals your credit card and uses it to make purchases, they're using the credit card company's money—not yours. That means you won't have to worry about your account being depleted and compromising your ability to pay your bills.
  • Credit cards build credit. Because credit cards have a line of credit attached to them, using one responsibly can help you establish and build your credit history.
  • Debit cards reduce your chances of going into debt. While you can overdraw a bank account, it's not the same as racking up thousands of dollars in debt on a credit card. If you struggle with overspending, a debit card may be the better choice.
  • Credit cards usually require a credit check. When you first open a checking account, you typically won't need to undergo a credit check to get approved. With credit cards, though, the card issuer will want to understand your credit history before it can approve your application. Most of the best credit cards require good or excellent credit to get approved.
  • Credit cards offer more benefits. Although there are some debit cards that offer cash back, you're much more likely to get rewards on your everyday purchases with a credit card. What's more, many credit cards offer intro bonuses that can be worth hundreds of dollars, and you may also be able to get certain benefits when you travel and shop that you can't get with a debit card.

While you can use both debit and credit cards simultaneously, think about your needs and your goals to determine which one to use more often when you shop and pay bills.

Decide if Debit Cards Work for You

Whether you use a debit card or a credit card to pay your bills, it's important to make sure you're using the right option for the right purposes. For example, some merchants may charge you a convenience fee if you use a credit card, so it's best to add a debit card or your bank account information. In other cases, you can earn rewards on a credit card for something you were going to pay for anyway.

Your credit can have a big effect on the credit cards for which you're able to qualify. With an Experian account, you can take a look at your credit report and credit score for free so you know exactly where you stand in the eyes of credit card issuers. Taking steps to improve your credit can help you qualify for a card that gives you better rewards and benefits.