What is a debit card?

Debit cards are free or very inexpensive to use, provided you know how to use them. Here are ways using a debit card can cost money -- and how to avoid paying:

Account maintenance fees

Debit cards are usually a perk of checking accounts, and maintaining those accounts may require a monthly fee of roughly $10 to $15. At many banks, these fees are waived if you maintain a certain minimum monthly balance or authorize direct deposits into your account. 

You'll also want to consider other typical banking fees, such as overdraft fees (also known as insufficient funds fees). They can pack a punch if you attempt to withdraw or spend more money than you actually have in your account, whether that's with your debit card or otherwise.

ATM fees

Debit cards also function as ATM cards, so you can use them to get cash even when your bank is closed. There's no charge for this convenience as long as you use ATMs within your bank's network. If you go out of network, though, you could face a fee of about $4 or $5 to withdraw your money.

Transaction fees

Finally, you may pay a small fee for each transaction if you use your debit card with a 4-digit PIN, or personal identification number, instead of your signature. That's because your transaction is routed via the banking network instead of a Visa or Mastercard network, and some of that cost may be passed back to you. 

The retailer typically eats the cost of signature transactions. So keep that in mind next time you're asked, "Debit or credit?"

On the surface, debit cards and credit cards seem quite similar. After all, both are accepted practically anywhere, and both sport some of the most iconic names in payments, like Visa or Mastercard. 

However, there are many major differences between the two, including:

It's your money

When you swipe a debit card, you're making a purchase with your own money because your debit card is a direct link to your bank account. With a credit card, you're essentially taking out a loan from your card issuer that you pledge to repay.

No bills

You won't owe a monthly bill since you're using your own money with a debit card. With a credit card, you must make a minimum payment on your balance every month. And if you don't pay off the entire balance each month, you'll also pay interest.

Spending limits

With a debit card, you're limited only by how much money you have in your bank account. Credit card issuers will set a certain credit limit partially based on how creditworthy they think you are and increase it over time if you use the card responsibly.

Application

A debit card is typically an included benefit of most checking accounts and, in some cases, savings accounts. A debit card can be yours as long as you don't have a checkered banking history. However, a credit card requires a lengthier application that includes a credit check. If your credit score is low, you may not qualify for most credit cards.

Effect on credit

You won't build your credit history with a debit card since you aren't actually borrowing anyone's money. Responsible usage of a credit card can raise your credit score -- and irresponsible usage can lower it.

Risk from theft

If your debit card falls into the wrong hands, a thief can access your bank account directly. Unfortunately, you could be on the hook for $500 of the damage if you don't file a report within two days of fraud or theft. 

With a credit card, you'll only be charged a small (if any) amount. Your credit card issuer has a lot more incentive to help you, since the thief is stealing their money, not yours.

One benefit that credit cards have over debit cards is that they're far more likely to offer rewards programs. Some allow you to earn cashback for certain purchases, while others let you accumulate points you can redeem for free airfare, hotel stays, or other goods and services.

In the past, a number of debit cards offered similar rewards programs. Though often not as lucrative as their credit card counterparts, they were a nice perk for debt-wary consumers who wanted to avoid credit cards but still earn rewards for their spending.

Unfortunately, many of these programs have been phased out in the past few years. In the wake of the recession in 2020, new legislation took a huge bite out of the fees banks can collect from debit card transactions, and several banks axed their debit card rewards to help make up for lost revenue.

There are still a handful of rewards debit cards out there, but you'll have to keep your eyes peeled. 

Until now, we've focused on traditional debit cards that are connected to your bank account. There are also prepaid debit cards, however, and it's important to understand how they are different:

Funding source

With a traditional debit card, you can pay for purchases with whatever money is in your linked bank account. You have to load money onto the card with a prepaid debit card before using it.

Overdrafts

If you opt into your bank's overdraft protection service, your bank will cover you if you make a purchase with your traditional debit card that exceeds the amount of money available in your linked account. (This service does typically come with a hefty fee, however.) With a prepaid debit card, you will not be able to make a purchase if you don't have enough money on the card.

Fees

Traditional debit cards don't cost anything to use directly, though there can be costs associated with maintaining your bank account or choosing PIN transactions over signature transactions, for instance. However, prepaid debit cards usually come with a lot of fees. Activation, reloading, and monthly maintenance fees are common and can vary substantially from one card to another. 

Also: The best prepaid debit cards

Application

While you usually don't need a credit check to get a traditional debit card, you must be approved for a bank account. That can be tricky if you've had a checkered banking history. However, just about anyone can get a prepaid debit card -- all you need is the cash to fund it.

While prepaid debit cards can be an option for those who don't have (or want) a bank account, the often-hefty fees make them a subpar replacement. Still, they're undeniably convenient.