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What are Debit Cards? How do debit cards work?The world of personal finance has changed dramatically over the last few decades, and it continues to change, whether we like it or not. It started with barter, but cash has been king for a long time. Even in todays electronic banking world, everybody still accepts cash. And checks were usually accepted by local merchants -- though they were more cumbersome to use (and still are -- don't you love standing in line behind someone writing a $18 check at the grocery store?) and couldn't be used when traveling outside your immediate area. But when credit cards first appeared as a retail puchase mechanism, it was a pretty big deal. Early credit cards were issued by specific merchants and were used for buying products just from them, like appliances from Sears or gas from Chevron. That evolved into things like American Express and Diners Club charge cards, which required the balance to be paid each month in full. But from the late 50's to the mid 60's, things really changed with the introduction of the VISA and Mastercharge cards and the interlinked merchant system that allowed to you make purchases anytime, anywhere during the month, then pay off the balance at the end of the month or pay an interest charge on any revolving balance.
Debit Cards vs. Credit Cards - Are Debit Cards Safe?So these days pretty much everyone uses and understands how credit cards work. A bank issues you a credit card, with some credit limit, that allows you to make purchases during the month from anyone who accepts credit cards. Merchants pay the bank a small fee for the convenience of getting instant payment from you (usually about 2%), the bank extends you credit over the month by paying the merchant, then you pay the bank/credit card company at the end of the month when you receive your statement (or you can make just a minimum payment and pay interest on your outstanding balance). Since the credit card company is electronically linked to the bank accounts of its merchant partners, it has the power to reverse charges and take money back from merchants in the case of fraud, so the bank is able to offer you protection (maximum $50 loss) against fraudulent use of your card. How is a debit card different from a credit card? Debit cards are linked directly to your checking account -- in fact, that are also known as check cards. When you buy something with a debit card, the money comes right out of your checking account, almost like you were using a check or cash (you don't get a bill at the end of the month like with a credit card). Some people like this feature, making them feel more responsible that they are no buying things on credit and racking up big bills they will be unable to pay off at the end of the month. Debit cards can be used like credit cards in a store, though they require the input of a secret PIN, just like an ATM card.However, debit cards can also be used over the phone or in other circumstances requiring just a signature, or somewhere like a gas station where you can just swipe the card. Take a look at your debit card - if it has a VISA or MasterCard logo on it, it can be used this way. If a thief gets your credit card, he can buy all kinds of stuff but he never affects your checking account or gets access to funds there. But debit card fraud, with direct access to your checking account, is not protected the same as credit cards. While most banks claim to limit debit card fraud to $50, it could be as high as $500 for incidents reported more than 48 hours after they occur, or as high as your entire account balance for things not reported within 60 days. The biggest problem is normally blocked funds while the bank investigates, which could be a problem if you are trying to write a check for something like, let's say, your rent. Banks want you to use debit cards, though, because they can charge higher transcation fees on them - but you don't need to fall for their marketing or sales pitches. So why use a debit card? There really is no reason to assuming you can control your spending on your credit card. There are no real benefits to using a debit card, just more risks and possible troubles. So we recommend not using debit cards. If you can't control your spending or can't get a normal credit card due to credit issues, look into a prepaid credit card, discussed below. Definitely don't use debit cards for online (internet) transactions and purchases. Also, using credit cards, if you pay them off each month, is like getting an interest free cash-advance loan each month - the bank pays for all your purchases upfront, and you pay the bank 30 days later -- it's tough to get a better deal than that! Prepaid Credit Cards - Prepaid Debit CardsIf you are worried about security and fraud, if you want a credit card for a teenager, or if you have credit problems and can't qualify for a normal credit card, another solution is to look into prepaid debit cards and prepaid credit cards. You can check out MasterCard.com for information on the prepaid gift cards and prepaid debit cards they offer. Prepaid gift and debit cards work almost like cash - you buy the card to fill it up with value, then you can use the card at any store that accepts credit cards, with the amount being deducted from the initial value of the card. Unlike gift certificates valid only at certain stores, the prepaid cards can be used anywhere. These work well for teenagers, for example, if you want to give them $75 per month for allowance or something .You fill the card up at the beginning of the month, and they can spend ONLY $75 until it is empty -- then no more purchases. Prepaid credit cards usually work a little differently. Prepaid credit cards are for people that don't qualify for a normal credit card. With a prepaid card, you give the bank a deposit of cash in advance, then you can use the credit card until that amount is reached. Once you have proved that you can manage your money responsibly, you can often qualify for a normal credit card. You can check out offers and information on prepaid credit cards at CreditCards.com.
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