Many consumers use debit cards instead of cash, checks or credit cards. With a debit card, you also can draw cash from your bank account at an ATM.
When you use a debit card, it is a "buy now, pay now" transaction. The money you spend on a debit card is automatically subtracted from your account right away. If you don’t have enough money in your account, the bank can refuse to honor the card, or they may loan you the money in order to honor the transaction, and charge you an overdraft fee of about $34. Read more about unauthorized overdraft loans.
Debit cards are becoming the dominant form of payment for consumers, according to a 2006 Federal Reserve Board research report.
Spending on debit cards topped $1 trillion for the first time in 2006.
In 2006, the number of debit transactions outnumbered those on credit cards by more than 2 billion.
Debit cards are especially popular among women and people between the ages of 18 and 25.
Customers who used debit cards more than 20 times a year paid an average of $223 in overdraft fees annually, compared with $40 for those who didn't use debit cards at all.
| Debit Cards | Credit Cards | |
| Pros | Easy to Get - It is much easier to qualify for a debit card than a credit card. | Good Protection for Lost or Stolen Cards – You are only liable for the first $50 stolen if your card is used fraudulently. Some Merchant Protection – If a merchant does not sell you the agreed upon product, in most cases you can withhold the first $50 of payment until the dispute is resolved, and the credit card cannot report your nonpayment to a reporting agency. |
| Cons | Unauthorized Overdraft Loans - Even if a purchase or ATM withdrawal puts your account in the red, the bank may approve the transaction and charge you a fee around $34. They will charge you this fee each time you overdraw. Read more about unauthorized overdraft loans. No Merchant Protection – If a merchant does not sell you the agreed upon product, you cannot stop payment to them through your bank. | Harder to Get at Fair Rates - Banks may refuse to issue credit cards to consumers with poor credit ratings, or may only offer these consumers cards with very high interest rates and fees. Tricks and Traps Business Model – If you are unable to pay your entire credit card bill each month and must carry a balance, the balance can turn into a long-lasting debt treadmill. Read more here. |
Read more about the differences between credit and debit cards on the Red Tape Chronicles.
When you use your debit card to make a purchase, the merchant will often ask if you prefer to use "credit or debit." No matter what you answer, it is a debit transaction, meaning it follows the rules as outlined in the Debit Card column above. The money will be deducted from your checking account right away, and if you overdraw your account you will likely pay an overdraft fee.
What these merchants are really asking is whether you prefer to authorize the purchase with a signature (credit or "off-line" method) or by entering your Personal Identification Number (debit or "on-line" method).
In on-line, debit transactions, the PIN terminal connects to a system that reports whether the bank will honor the transaction. The funds are immediately removed from the account if the bank authorizes the transaction. By contrast, off-line credit transactions are not withdrawn from your account immediately. Even so, you cannot stop payment on these transactions.
Debit cards often are called check cards. This is a misleading name because it sounds like a debit card works like a check. But the two are different. When you write a check and give it to the merchant, usually the money does not come out of your account for a couple of days at least, and often longer. That gives you a little time to put enough money in the account to make sure the check does not bounce. Also, if you pay with a check and become dissatisfied with your purchase, you can tell your bank to stop payment on the check and they will do so if you notify your bank promptly after you gave the check to the merchant. With a debit card, the money comes out of your account right away and you cannot stop payment unless you live in Michigan.
Confusion: It may be difficult for you to figure out exactly how much is in your checking account at the time you are paying for a transaction with a debit card, especially since banks do not always post transactions in the order they occurred. The funds in many checking accounts are withdrawn when consumers write checks, use ATM cards, and authorize recurring bills like rent, utilities, or mortgage payments to be withdrawn automatically each month. Also, the bank may subtract fees for various reasons from the consumer’s balance.
Unauthorized Overdraft Loans: If you do not have enough money in your account to cover the amount of the purchase you are making with your debit card, the bank may refuse to honor the transaction, and you will have to pay some other way. However, the bank may honor the card even though you do not have enough money in your account. When the bank does that, the bank treats the transaction as if you have taken out an "overdraft loan" - which is a very expensive type of short-term loan (read more here).
Unauthorized use: Persons may use your card without your authorization or permission. For example, someone may steal your card or you may lose it and the finder may use it. A thief may use your card to pay for purchases even if the card never leaves your possession; thieves have ways to discover enough information about your card so they can buy products online or by phone. The first you may learn about the unauthorized use of your card may be when the bills your bank pays automatically do not get paid, checks start bouncing, the bank charges you fees for each bounced check or the people you tried to pay by check are still demanding your money. In these cases, a thief used your debit card to take money out of your account, so not enough was left to pay your checks and other obligations. Unlike credit cards, there is not very good protection if someone fraudulently uses your debit card. Click here for more information.
| Description | Title | Date | Organization |
| Brochure | Understanding Debit Cards | April 1, 2008 | Consumer Action |
| Report | The Darker Secrets of Debit | September, 2007 | Consumers Union |
| Link | Debit Cards | Consumers Union | |
| Brochure | Credit v. Debit - Which Should You Use (PDF) | The National Consumer Law Center | |
| Fact Sheet | Consumer Fact Sheet | U.S. PIRG | |
| Article | Understanding Debit Cards | AARP |
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