Most checking accounts today come with an accompanying debit card. A debit card lets you make purchases at stores or online by having the money taken directly from your bank account. Unlike a credit card, which is a kind of short-term loan that you pay back later, with a debit card, you pay immediately with your own money, as if you were using cash.
According to the 2012 edition of How America Pays for College, 80% of 18-24 year-old undergraduates carry debit cards. But does that popularity translate into smart money management? The answer depends on the reasons for using a debit card and how you manage your spending.
Debit cards as protection against overspending
A debit card can help you guard against overspending since (in theory) you can only spend the money that is in your bank account. However, since many merchants usually will not reject your card if you have insufficient funds in your account, it’s important to keep close tabs on your account balance. If you do not, you can incur an overdraft fee.
- Linking your debit card checking account to a savings account, credit card, or line of credit can help you avoid overdraft fees.
- Setting up an online account with your bank to manage debit card purchases, checks, and bill paying in one location can also help you avoid overdraft fees.
Overdraft fees may not be the only fees you encounter with a debit card—some banks charge a monthly fee or a fee on each debit card transaction. Before selecting a debit card, review the terms and conditions of the account to see which fees apply and learn whether there are ways to avoid them (such as by maintaining a minimum balance in your account or having direct deposit of your paycheck).
Debit card security
If your debit card is lost or stolen, you generally won’t be liable for unauthorized purchases as long as you contact your financial institution right away. But your account could be unavailable for up to 10 days after you report the loss. Compare that with a lost or stolen credit card, where you can simply put the card aside and use another one while the issue is being resolved.
- To limit your liability, always report a lost or stolen debit card immediately.
- Choose a PIN-based debit card instead of a signature-based card so you have a layer of security to help protect you against identity theft.
Debit cards and returning merchandise
If you need to return merchandise that you purchased with a debit card, you may be asked to accept a store credit instead of getting a refund. If, on the other hand, you had purchased the item with a credit card, you may have more options. With a credit card, you have the right to dispute purchased items under certain situations.
- Consider purchasing online items (things you can’t see, test, or try on before purchasing) with a credit card instead of a debit card.
Prepaid debit cards
A prepaid debit card works like a debit card without the checking account. You can load the card with funds by direct depositing your paycheck onto the card or by making a withdrawal from an ATM. You can only spend the amount that is on the card—that makes it a good defense against overspending.
Traditionally, prepaid debit cards were associated with individuals who did not have a checking account at an FDIC-insured institution. That meant the funds on the card were not FDIC-insured, you had fewer consumer protections in the case of fraud or theft, and fees could be quite high.
Recently, however, some of the lines between regular debit cards and prepaid debit cards have blurred. The result has been lower fees and more features for prepaid debit cards (including FDIC insurance on some). Be sure to shop around before getting a prepaid debit card—the fast-changing nature of the industry means that the best card today could be uncompetitive in the near future.
The bottom line
If you manage your money carefully, limit your spending, and pay your bills on time each month, both debit cards and credit cards can be equally convenient tools for making purchases. And there’s no reason why you can’t have both. Choose the card that meets your lifestyle and offers the best combination of features (including rewards, if applicable) and low cost.