Debit card terminology
In understanding what is a debit card, it can be helpful to define some key terminology. These are some terms you should be aware of when using a debit card.
Checking account: A checking account is a bank account that's used for everyday needs, such as receiving income and making purchases. A debit card is typically linked to a checking account.
Savings account: A savings account is for money you plan to save rather than money you plan to access regularly. Savings accounts give you immediate access to your funds, but Federal Reserve Regulation D (or banks still following it) limits savings accounts to six "convenient" transactions per month.
Personal identification number (PIN): A PIN is a confidential code you set up upon opening a debit card that provides an extra layer of security when processing transactions.
Debit card number: Your debit card number is the 16-digit number found on the front of your debit card.
Account number: Your account number is a unique number associated with your bank account, and is typically 10 to 12 digits long.
Routing number: Your routing number is a nine-digit number associated with your financial institution. You can find this number on the bottom of your checks, or by contacting your financial institution.
Card verification value (CVV): This is a three-digit code (four digits in the case of American Express cards) printed on the back of your debit card. It provides additional security for online purchases.
Automated teller machine (ATM): An ATM is a banking machine. At an ATM, you can use your debit card and its associated PIN to withdraw cash from a linked bank account.
In-network and out-of-network ATM: Financial institutions have their own networks of ATMs. Using an in-network ATM is often free. Out-of-network ATMs are those operated by other financial institutions. For using an out-of-network ATM, you might be charged an ATM fee by the other financial institution, your own financial institution, or both..
Direct deposit: Direct deposit is when you set up incoming payments (typically paychecks) to be deposited directly into your checking account (rather than sent in the form of a check).
Overdraft: When you overdraft your bank account, you've used your debit card to pay for a purchase that costs more than the money you currently have in your account. Sometimes, these transactions will be denied. If they go through, it's called an overdraft. You'll have to pay back the overdrafted funds and any associated fees.
Overdraft protection: Some bank accounts offer overdraft protection. This is a service that allows you to connect a back-up source of funds such as another checking account, a savings account, or a credit card. In the event you overdraft your main account, additional funds will be pulled from your back-up account.
Overdraft fee: Most banks charge an overdraft fee when you spend more than what's available. The average overdraft fee is $35.
Foreign transaction fee: Some debit cards charge a fee for every purchase you make in a foreign country. The typical foreign transaction fee is 3%, meaning you're charged a $3.00 fee for every $100 you spend while abroad.
Traveling abroad? You can avoid the extra 3% fee by swiping no foreign transaction fee credit cards that charge you $0 for making payment outside the United States. Keep in mind, the most widely-accepted cards accepted abroad are those issued by Visa and Mastercard.
Types of debit cards
There are a few different types of debit cards, and learning about them can help you understand what is a debit card. Read up to decide which one is best for you.
- Debit cards: Also known as a check card, this is the most common type. They're typically backed by a financial institution, such as a traditional bank, online bank, or credit union. Additionally, they're often connected to a payment processor like Visa or Mastercard. These cards are linked to the cardholder's checking account. Payment money is transferred from that account. These cards can be used to purchase from a merchant or to withdraw cash from an ATM.
- EMV cards: An EMV card is a debit card with an EMV chip. The chip provides an added layer of security. Each time a transaction is processed, the chip creates a unique transaction code that can't be used again. This makes the data on EMV cards much harder to steal than the data on a traditional debit card, which uses a magnetic strip.
- ATM cards: An ATM card can be used at an ATM to withdraw cash. Funds are withdrawn from a linked checking or savings account. While regular debit cards can be used to withdraw funds and make purchases, ATM-only cards cannot be used to make purchases.
- Prepaid debit cards: These cards function like other debit cards, but they are funded differently. Instead of linking a bank account, you load money onto the card with cash, a check, a bank account transfer, direct deposit, or sometimes a credit card. They're useful for folks who don't have a bank account. Be careful: These cards sometimes charge monthly fees and reload fees.
History of debit cards
Until the last few decades, cash and check were the most popular payment methods in the United States. Debit cards were introduced in the 1980s as ATM cards. At that time, most consumers used them only to withdraw cash from their bank accounts at an ATM.
It wasn't until the mid to late 1980s that merchants started to acquire point-of-sales (POS) systems that accepted debit cards as a form of payment. They weren't a common payment method until the early 1990s, when debit cards finally received Visa and Mastercard logos. This development allowed consumers to use Visa or Mastercard-branded debit cards at any merchant that accepted Visa and Mastercard credit cards. By the late 1990s, debit card purchases outnumbered check purchases.
Debit cards are one of the most widespread and convenient forms of payment. While they don't build credit or offer generous cash back or travel rewards, and they aren't quite as safe as credit cards, paying with your own money can provide a safety net to avoid debt.