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What is a debit card and how to use it wisely

As you build your financial know-how, one of the basic tools in a financial toolbox is a debit card. That is, if you educate yourself about how to use it wisely. Unlike a credit card, which a holder uses to make purchases using borrowed money, a debit card is linked to an account with money you already have.

When you make a transaction at a store, online, or at an ATM, you simply swipe your card or enter the card information and the sum of the transaction is debited from your account. Debit cards are typically linked to a checking account, although pre-paid cards are also a similar, convenient option. 

How do you get a debit card, anyway?

After you open a checking account, most banks will provide you with a debit card so that you can make purchases and ATM transactions. Before opening your account, you can ask a teller or consultant to make sure that you will be able to get a card associated with your checking account. 

How is a debit card different from checks and credit cards?

Debit cards are also known as check cards because of their similarity to their predecessor, the check. Debit cards and checks essentially work under the same premise, taking the cost of a transaction out of your existing checking account. Debit cards are, in essence, checks in card form. 

At the other hand, credit cards are not linked to an existing fund. For that reason, every time you use a credit card, it is similar to taking out a loan. When you swipe a credit card, you’re promising to pay back the cost of the purchase at a later date. Usually, if you pay the purchase back within the same billing period, you do not accrue any interest on that purchase.

However, if you are unable to do so for whatever reason, generally your credit card company tacks interest on to the original purchase. 

Is it a good idea to have a debit card?

There are many advantages to having one, aside from it being convenient. 

Avoid credit card interest

Since money is automatically withdrawn from your account once you use your card, you don’t have to worry about paying off that purchase plus interest in the future, as you would with a credit card. 

Buy online

A serious plus to having a debit card is that it allows you to engage in the online economy without a credit card. Most vendors online accept debit and credit cards.

Track your spending

When you make a transaction with your debit card, a record is automatically generated. If you use online banking, you’ll be able to login to your account to see all completed and pending transactions. If not, your bank will send you a monthly statement detailing your card spending and other transactions related to the checking account with which it’s linked (i.e. transfers, direct deposits, etc.).

Drawbacks to having a debit card

While it can be a convenient tool to help you engage in the online economy and to make purchases and ATM transactions with ease, there are also a few drawbacks to having a one. 

Overspending and overdraft fees

Overspending is a serious risk with, since you don’t physically have cash in your wallet to know how much you have left. If you overdraw your account by even one cent, your bank will probably clobber you with an overdraft fee. This type of fee is a fine you pay for trying to spend money you did not have in your account at the time of a purchase.

Overdraft fees vary by bank. So, if you had $2.00 in your checking account but bought an ice cream that cost $2.01, your bank will tag on a $30 or so fee, making that innocent ice cream cone suddenly very expensive.

Fraud and theft

While cash, credit cards and checks are also at risk of being stolen or used fraudulently, it is important to recognize that this is also a risk for debit card users. Sometimes thieves tamper with ATM machines, websites, or card readers to steal card information for their own use. Some advise limiting card use to avoid such dangers.

Debit cards can be a convenient tool to help you make purchases more easily both in-person and online. Being cognizant of the pros and cons of their use can maximize its utility and also help you to avoid some of the common pitfalls that plague debit card users, like overdraft fees.

Developing smart use habits is an important component of your financial health, in addition to saving, debt management, and investing. 

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