A debit card can be used for purchases just like cash – but unlike a credit card, the money comes straight out of your bank account at the time of the purchase! So while debit cards can be used in the same situations as credit cards, there’s a different schedule for when the bank gets reimbursed for the cost of the purchase. With a credit card, you actually are getting that money “on credit” – that is, it’s extra money that you can spend, which you’re expected to pay it back later. An easy way to remember it is to think that a debit card gives you exactly the opposite of credit – an instant debt. It takes away your money (from your checking account) at the moment of the transaction.
Obviously, the phrase “debit card” is confusing to a lot of people. That’s probably because it’s the bank that’s issuing both the credit card and the debit card, and they named it based on how they would classify the money that you’re using. Consider these two scenarios. You’re trying to make a purchase. The bank advances you the money – on credit – with the understanding that at the end of the month, you’ll make them good for all of the money they’ve credited you (by paying them back). The banks are actually taking a risk. They’re handing over some of their money, with nothing but hope and trust that they’ll get it back from you at the end of the month. Banks don’t like to take risks, which is why they’ve tacked on extra penalties if you ever miss a payment. (If they’re going to have a problem getting their money back, then you’re going to have to
Now here’s scenario two. You’re trying to make a purchase. The bank grabs some of your money out of your checking account, and uses that to pay for your purchase. The bank hasn’t taken any risk. They’ve just transferred the money out of your account to cover the cost of the purchase. And there’s one big advantage for you: at the end of the month, there’s no bill to settle up.
Debit cards are trickier than they look. They’re shaped like a credit card, and can often be used where you’d normally use a credit card, but there’s now some new legislation in place. In the past, banks would let you overdraw your accounts with the debit cards – and then collect a hefty fee from you, arguing that they’d “advanced” you the money. Now, unless you request otherwise, most banks will simply decline to fund your purchase. There’s fewer fees – but you won’t be able to finish your purchase until you come up with some more money!
There’s a very simple trick that will help you understand the exact meaning of debit cards. If you look it up in a dictionary, you’ll see that a debit is basically the opposite of a credit – it’s something that reduces your total net worth instead of increasing it. Keeping that in mind will help you to understand how a debit card works!