What is a Debit Card?

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Debit cards, sometimes called bank cards or cheque cards, are growing in popularity in Australia and around the world. In many instances a debit card functions just the same as a credit card, except for funds availability (which can be an issue for some most people).

Debit Card vs Credit Card

A debit card often appears identical to a credit card except that many bank cards include the debit card disclosure tag, the line of print on the front of a bank card declaring it a debit card, not a credit card. Almost all debit cards include a Visa or MasterCard logo, enabling the card to be passed through the credit card machine at a store or website.

The card number formats the same as the accompanying logo; those with the Visa logo has a similar card number sequence, and those with MasterCard encompass that number format. Debit cards have the three- or four-digit card security code on the back somewhere near the card signature line, as well.

Bank cards, however, do not extend purchase limits beyond the funds available in the supporting checking or savings account as credit cards can. Because credit cards involve a loan of funds, and debit cards do not, there is no interest associated with or accruing on a debit card purchase. However, some banks charge a usage fee on debit card transactions. Requesting the card purchase processed as a credit purchase can often avoid that service charge.

Non-Bank Debit Cards

Some debit cards are not issued by standard financial institutions. Pre-paid debit cards allow rotating funds deposit on non-standard debit cards.

For example, paying $150 for a debit card enables purchases totaling up to that $150. When the available balance is met or becomes low, the user can deposit more funds to extend purchasing power:

1. A balance of $75 remains on a card. Adding $100 brings the balance to $175.
2. Spending $167 reduces the pre-paid debit card available balance to only $9.

The Advantages of Paying by Debit Card

A debit card enjoys some benefits over a credit card:

1. No Interest: Because a debit card uses your own funds and doesn’t entail borrowing money from a credit card issuer, there is no interest.
2. Budget Aid: Debit cards use only what the user has available, unless the associated account has overdraft protection. There is no need to budget additional monthly payments as credit cards often require.
3. Versatility: Debit cards can be used to make any purchase the card or account balance will support or in any ATM.

Debit Card Disadvantages

As convenient as a debit card is, there are still a few disadvantages:

1. Purchase Limits: While standard credit cards have spending limits, an account balance does not contribute to immediate restrictions. A debit card cannot be used for a purchase above the checking or savings account registered to the card. As a rule, emergency funds are limited; special gifts that cost more than the account balance aren’t possible.
2. Vehicle Rentals: Some rental companies do not allow rentals of cars or trucks based on a debit card; credit cards are often required, simply as a security measure against damage and/or theft.
3. Can’t Earn Points: Earning points on a rewards credit card or frequent flyer credit card is a big attraction for lots of people. There’s only one debit card in the world which lets people earn points while spending their own money through their debit card and its Perkstreet in the USA. No such card exists in Australia to the best of my knowledge.
4. Pre-Paid Card Limitations: Those debit cards not issued by a financial institution may not be valid methods of payment on service accounts or via the Internet; read all restrictions and limitations prior to purchasing this type of card.

For the budget-conscious consumer, debit cards are a valid, convenient, and versatile method of making purchases and payments whether in stores, on the Internet, or often on recurring accounts while avoiding expensive interest charges and escalating outstanding balances.

Image source: Charlie Brewer

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