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What are Debit Cards and how do They Work?

Jan 2, 2020 | Cognition

Debit cards are commonly used around the globe. It is a convenient way to pay for goods and services, both online and offline. But how does such a card even work? Now is a good time to dive deeper into the mysteries surrounding the debit card. 

This is not a Credit Card

Most consumers often think credit and debit cards are one and the same. That is not exactly the case. Both types of payment cards look very similar on the surface. Behind the scenes, however, they operate on a different level altogether. 

A credit card does not draw money from a checking account directly. Instead, it lets consumers spend money up to a certain limit and bill them at the end of the month. 

Failure to meet this payment results in interest rates and finance charges. Extensive credit card debt can reduce one’s credit rating accordingly.  This credit rating is crucial when applying for a [new] credit card.

High limits associated with credit cards aren’t helping these matters. It is often possible to spend more than one’s monthly income. On the other hand, this allows for convenient larger purchases. It is a double-edged blade of convenience and juggling one’s financial assets. 

Why Debit Cards are “Better”

Every type of payment card has advantages and drawbacks. Debit cards are no exception to this unwritten rule. While they are much easier to acquire (regardless of credit rating) they also impose spending limitations.

One can only spend the funds in one’s bank account. Some banks will allow users to go past that limit. The end result is an overdraft situation, and thus extra fees. In most cases, the level of overdrafting is kept firmly in check. 

One major drawback of a debit card is the minimal buyer protection. These transactions are often put in the same category as cash transactions. 

Getting the money back following a debit card payment is challenging, if not impossible. 

In the case of debit card theft, similar issues arise. Getting a card back after someone stole and abused a debit card is rather rare. With a credit card, there are chargebacks to be filed. 

Debit cards do not benefit from this same level of protection.

Choosing One or Both?

Different situations tend to favor different payment card types. Credit cards have their use for larger expenses. Moreover, they can be a viable addition for shopping expenses, both online and offline. 

Not overspending is crucial in this regard, and very challenging. 

Debit cards offer a similar degree of convenience for smaller purchases. Transactions clear within 24 hours, making them faster for the merchant. They don’t like to wait days or weeks for their money. 

Moreover, most businesses accept debit card payments. The same can’t always be said for credit card transactions.

One thing to watch out for is temporary charges. Some locations put a fixed charge on one’s debit card. This is common among gas stations, for example. Once the actual transaction is complete, the temporary charge will be reverted. 

Images courtesy of their respective sources.

Fintoism is not providing financial or investment advice. All content published on this platform is for entertainment and educational purposes only.

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<a href="https://fintoism.com/author/oglock/" target="_self">JP Buntinx</a>

JP Buntinx

JP Buntinx is passionate about cryptocurrencies, fintech, blockchain, and finance. He currently resides in Belgium.

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