Debit versus credit: Part 1
What is a debit card and how does it work?
Debit and credit cards can make shopping much easier for consumers. While they look very similar there are important differences. This article will focus on debit cards and address the following questions: what is a debit card, what happens when I use my debit card and select debit or credit?
What is a Debit Card?
The purchases that you make using a debit card come directly from a checking account that you open at a local financial institution (such as a bank or credit union). Although debit cards have a logo (i.e. Visa or MasterCard), a debit card is not a loan and does not have the same influence as a credit card in building your credit history. Because debit card transactions come directly from your account, you must have the funds in your account to use it.
What happens when I use my debit card and select debit?
- The retailer will ask you to enter a four-digit Personal Identification Number (PIN) to process the payment. When this happens, your bank or credit union account decreases immediately.
- Local stores prefer that you select debit because it is a less expensive option for them, but you need to be aware that you are opening yourself up to greater risk and liability if identity theft occurs. Debit cards are protected by law through the Electronic Funds Transfer Act and if a card is reported as lost within two business days, you are liable up to $50; if reported within 60 days, the liability for loss is $500; and after 60 days, the liability for loss is unlimited.
- Debit cards may have a limit per day for the total amount of transactions that can be made and may limit the amount of the transactions you may make. Check with your financial institution what limits may exist for your card.
- When using a debit card at a gas station, you may experience a hold on your account until the transaction clears (up to three days). This amount could range from $1.00 up to double the amount of your gas purchase. Contact the gas station for more details
What happens when you swipe a debit card and choose credit?
- Payment still comes directly from your checking account.
- Retailers will sometimes require you to sign your name to authorize the payment to take place (no Personal Identification Number will need to be entered).
- Your bank or credit union checking account may or may not decrease immediately. Check with your local financial institution for their policy.
- When using a debit card for payment of services like a car rental, the merchant will generally place a hold on your account for the entire amount of the rental for the length of the agreement.
- The liability for loss is the same whether you select debit or credit.
For additional information on debit cards review the Michigan State University Extension fact sheet, Debit versus Credit… Are they the same? The next article in this series will focus on credit cards.
Michigan State University Extension offers financial literacy and homeownership workshops throughout the year to help you become financially healthy. For more information about classes in your area, please visit either the MSU Extension events page or MI Money Health website. Additionally, you can take the Financial Health Survey at MI Money Health to access if you’re financially healthy and discover more ways you can improve your financial health.