Debit cards have the same form factor and magnetic stripe as credit cards, but are linked to a designated bank account of yours. Instead of getting a monthly bill for credit card usage that will contain interest and penalties, with a debit card the funds are immediately removed from your designated account and transferred into the merchant’s account.
While debit cards look and feel exactly like credit cards they are the exact opposite. Debit cards exist for pure convenience, to eliminate the need to carry large amounts of cash around to make retail purchases. For smart money managers, they can also eliminate the use of credit cards with their high interest rates, late charges and penalties. Debit cards have nothing to do with credit, borrowing or loans.
For the most part, debit cards are accepted everywhere credit cards can be used. Additionally, debit cards are multi-purpose cards that allow users to access their accounts at ATMs around the world. With a debit card and an ATM machine, a valid user can access his accounts, make withdrawals and deposits, and transfer funds from one account to another with ease.
In an attempt to launch society into a paperless one, debit cards were launched in the 1990s as a way of reducing the number of paper checks being handled by numerous financial institutions every month.
Merchants prefer debit cards over credit cards for the simple reason that the fees associated with credit card usage are a fixed percentage of the total amount of the transaction. For debit cards the fees are a small, fixed, nominal amount charged for the usage of the electronic batch processing system that handles the transfer of funds. The only limitation of a debit card over a credit card is that there are usually no point plans or discounts associated with their use.
There are two basic types of debit cards in use today. The first is the online debit card that requires electronic authorization for every purchase no matter how small. These online transactions are likely to be further secured by a personal identification number (PIN).
The second basic type of debit card is the offline debit card. They have the look and feel of a credit card, with holographic logos, but they may be subject to a daily limit in either the number of transactions allowed or the total amount being spent. Both types of debit cards, however, are limited to the amount of funds on deposit in the designated account.
Another basic difference between debit and credit cards is that with a debit card you can easily get a “cash back” amount from the retail establishment. There is never a fee for this cash back service as neither the retailer nor the bank is advancing you the money or incurring any additional costs in so doing. Credit card cash advances usually are accompanied by high fees beyond those charged for purchases.
In addition, debit cards can also function as a check guarantee card, backing up the paper check you are attempting to write with funds in the account. Credit cards, which have nothing to do with your checking account, are merely another piece of identification you are asked for when you write a check. A credit card does not guarantee the check nor will it have anything to do with helping you to cover a check in the case of insufficient funds, unless you take a cash advance from the credit card and deposit the funds into your account.
Debit cards can function in two distinctly different manners depending on your bank and the type of card you set up. In the first way, the amount of the purchase is verified against the amount of funds in the designated account. If the funds are not there, the purchase is denied just as if your credit card is over its limit, and the transaction is denied.
A second way to set up your card is to have what is known as a “switch or “electron” type of debit card. In this case the amount of the purchase may not be checked against the funds in your account and if there is not sufficient money to cover the purchase, the sale may go through regardless. Later you will be notified by your bank that you are overdrawn and you will have to deposit funds plus penalties and fees to cover the transaction.
While there are differences between debit and credit cards, the major difference is this: a credit card gives you time to make any purchase up to your credit limit and if you pay off the bill when it arrives, you will not incur any interest or late fees. A debit card is merely a matter of convenience. You are able to access and spend the actual cash in your account anytime, anywhere, without having to carry large amounts of money in your pocket.