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Financial Education for Everyone

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Understanding debit cards

September 5, 2008

Fifteen years ago, only a few million Americans carried debit cards. Today, more than 80 percent of us use them to withdraw cash, pay bills and make purchases at stores, restaurants and other merchants worldwide.

Not only are debit cards safer than carrying cash and more convenient than writing checks, they often offer better fraud and theft protection than either. But, like their credit card cousins, debit cards require careful oversight to ensure you don't overextend yourself – or risk security lapses.

How they work: Debit cards work similarly to checks, with transactions deducted directly from your checking account. You can use them to:

  • Buy goods and services either in person, on the Internet or by phone, reducing the need to carry cash or a checkbook
  • Make one–time or recurring bill payments – reducing postage and eliminating worries about missed payments
  • Withdraw money from ATMs

You can complete debit card transactions several different ways: Sign your receipt; place an order online, by phone or mail; enter a personal identification number (PIN); or simply swipe your card at select merchants that don''t require your signature.

Balancing and fees. Unlike credit cards, where the bank essentially loans you money until next month's statement, with debit cards the money is withdrawn directly from your account. Many people like using debit cards so they're not tempted to spend money they don't have.

However, with debit cards, if your account doesn't contain sufficient funds, the bank will either prevent the transaction (like bouncing a check) or cover the shortfall and charge you an overdraft fee. Overdrafts are costly – up to $35 per item – so to keep them in check:

  • Verify your account balance daily, online or by phone, tracking which deposits, checks and card transactions have cleared.
  • Enroll in online banking in case you need to transfer funds electronically.
  • Keep a cushion in your account in case deposits and withdrawals cross.
  • Record all transactions in your check register immediately. Don't forget about fees for using ATMs outside your bank's network.
  • When your monthly statement arrives, carefully balance it against your register to prevent mistakes that could trigger fees.

Security measures. Most debit cards carry the same security protections as credit cards – especially when you sign for purchases versus entering a PIN, use your debit card online, or transact with merchants that don't require your signature (typically for purchases under $25). Some financial institutions may extend protections to PIN transactions, so ask yours about its policy.

It's important to check your monthly statements and online balances often and promptly report any unauthorized activities. If your card is lost or stolen, contact your financial institution immediately. This can reduce your liability if fraud losses occur.

A few additional safety precautions:

  • Always take sales receipts and carbon copies and store them in case you need to reference them later.
  • Review your statements carefully. If you suspect a mistake, call your financial institution immediately – and always follow up with a confirmation letter.
  • Report lost cards or unfamiliar transactions immediately. This reduces your liability if fraud losses occur.
  • Choose and memorize a unique PIN and keep it private. Avoid obvious choices such as your address, phone number or birth date.
  • Avoid using unbranded or damaged–looking ATMs.

Debit cards can be a safe, easy payment alternative. Just be sure you take the same level of security precautions you would with cash, checks or credit cards.


This article is intended to provide general information and should not be considered health, legal, tax or financial advice. It's always a good idea to consult a tax or financial advisor for specific information on how certain laws apply to your situation and about your individual financial situation.