How Debit Cards Work

A debit card linked to an account containing federal emergency funds was one of the ways the U.S. government administered financial relief to victims of Hurricane Katrina in 2005. See more banking pictures.
Photo by Chip Somodevilla/Getty Images

There is nothing mysterious about debit cards. With their Visa and MasterCard logos, they may look like they're masquerading as credit cards, but they do not draw money from the same source as credit cards. Debit cards, sometimes called checking cards, draw funds from your checking account, not a line of credit.

Many debit cards are actually dual debit/credit cards. You can use them as one or the other. When you make a purchase with such a dual card, the card reader will ask whether you want to use your card as a debit or credit card. If you use it as a debit card, you enter your personal identification number (PIN) to authorize the transaction. You may also have the option to get cash back when you make a debit purchase. This is like accessing an ATM at the same time as your purchase -- you simply consolidate your transactions. If you use the card as a credit card, you put your John Hancock on a sales slip instead of entering your PIN.


As you can see, the basic process of a debit transaction is not complicated. But why would you choose to use a debit card instead of a credit card?

First let's compare debit and credit cards.


Debit Cards vs. Credit Cards

Banks in Baghdad have started issuing debit cards to customers, as advertised by this employee of Warka Bank on March 11, 2008.
Photo by Wathiq Khuzaie/Getty Images

Debit cards and credit cards each have advantages and disadvantages. The biggest advantage of debit cards over credit cards is that you don't need to worry about interest rates, monthly bills and finance charges. Since a debit card uses only the money you actually have, you won't build up an unmanageable debt by using it, as you might with unchecked use of a credit card. Credit cards, after all, accrue interest on unpaid balances. Unless you pay off your balance every month, you will always end up paying more for a TV, for example, than what the TV actually cost.

Credit card limits are often quite high, sometimes significantly higher than the average monthly balance in your checking account. If you aren't careful, your credit card balance can grow out of control. The limit on your debit card, on the other hand, is whatever you have in your checking account.


Another advantage of the debit card is how easy it is to acquire one. You can get a debit card with pretty much any checking account, whereas you can obtain a credit card only by applying for one. A debit card does not require an investigation into your credit history; most credit cards do require a credit check.

Just as the advantage of a debit card is that it draws on your actual funds, the disadvantage of a debit card is that you are limited by those funds. You can overdraw your checking account, which can result in your bank charging an overdraft fee. These fees can reach up to $25 [source: Bankrate]. But you can also go over your credit card limit, which results in a similar fee, and this fee can accrue interest. Debit cards don't license you to be irresponsible in your spending; you should always keep tabs on your transactions and account balance.

One advantage of credit cards over debit cards is that they can help you to make very large purchases that would be otherwise impossible, such as that plasma TV you've been eyeing. But it is easy with credit cards to feel like you can buy whatever you want, whenever you want. Live and spend within your means. (For more information on how to do that, take a look at How Discretionary Expenses Work and Ten Tips for Staying on Budget.)

A disadvantage of debit cards is the amount of buying protection provided to you by law. Debit card transactions very much resemble cash transactions. The money changes hands quickly, and it's difficult to get it back. If you want to return a broken or unsatisfactory item you purchased with a debit card, many businesses will only give you an exchange or store credit.

Also, it's worth noting that the laws that police stolen debit cards aren't as friendly as the laws that police stolen credit cards. You may find it more difficult to get your money when a highway robber steals your debit card than when a highway robber lifts your credit card. Learn more on the next page.


Choosing to Use a Debit Card

There are several things to consider when choosing whether to use a debit card. Debit cards are best for small, run-of-the-mill purchases -- the box of doughnuts for the boys at work or the bottle of water from the corner store as you walk to the beach on a hot day. When you get into large items like computers, TVs and furniture, it's usually better to use a credit card. These purchases can put a big dent in your finances -- a dent you might not be able to afford in one big hit. Spread over several months of credit card payments, the cost of a large item becomes more manageable.

Debit cards are convenient for both the customer and the merchant. Checks can be annoying to write, cumbersome to deposit and slow to clear. Debit card transactions usually clear within 24 hours. Plus, business establishments accept debit cards more often than they accept checks, and businesses generally pay less to process debit card payments than they do to process credit card payments.


Something to keep in mind when using a debit card is that some businesses, such as hotels and gas stations, put a hold on your card to ensure that they are paid for their product or service. For example, gas stations will often put a $50 hold on your card and then charge you for the actual cost of the gas you pumped. As soon as they receive the money due them, they will lift the $50 hold. If you use a debit card on gas purchases, this $50 hold could influence the available balance in your checking account, affecting other purchases you might make before the hold is lifted.

If you choose to use a debit card, make sure you protect your card and account information. Keep your PIN safe; don't carry it around on a slip of paper tucked into your wallet. Memorize it. Also, don't make your PIN something obvious, a number that a thief could easily connect to other identifying information, such as your street number or a sequence of digits from your phone number. Pretty much anyone can get this identifying information, so don't make it easy for a thief.

As we discussed on the previous page, if your debit card is stolen, you may find it more difficult to get your money back than you would if your credit card were stolen. Under the Electronic Fund Transfer Act, as long as you report your card stolen within two days, you won't lose more than $50 of the money a thief draws from your account. If you don't report for up to 60 days, you could be liable for as much as $500. Beyond 60 days -- well, let's hope you have a good supply of money in another account. Luckily, Visa and MasterCard, as well as many banks, will not hold you liable for debit transactions you did not authorize.

If you'd like to know more about debit cards and related topics, follow the links on the next page.


Lots More Information

Related HowStuffWorks Articles

More Great Links


  • AARP. "Understanding Debit Cards." (Accessed 5/16/08)
  • Borzekowski, Ron, Kiser, Elizabeth K., and Ahmed, Shaista. "Consumers' Use of Debit Cards: Patterns, Preferences, and Price Response." Federal Reserve Board (Washington, D.C., 2006) (Accessed 5/16/08)
  • FDIC. "The Debit Card Debate." Spring 2006. (Accessed 5/16/08)
  • Lazarony, Lucy. "The ins and outs of debit cards." 11/20/2006. (Accessed 5/16/08)
  • McBride, Greg. "Used right, debit cards can save money.", 10/4/07. (Accessed 5/16/08)
  • Yu, Roger. "Evacuees can get $2,000 per household from FEMA." USA Today, 9/7/05. (Accessed 5/18/08)