Finance explained: what is a debit card?
The amount of plastic cards in our wallets and purses seems to go up and up over the years. In the wake of new technology such as PayPass or PayWave, its easier than ever before to make purchases on credit. But with credit comes credit card interest rates on purchases and balances. If you don’t pay off your credit card debt, it soon climbs higher and higher. But you may have heard of a product that’s similar to a credit card: a debit card. What is it? Find out more in Smallloans.com.au’s latest instalment of finance explained.
It’s not an ATM or EFTPOS card
Most banks issue their customers with an ATM card or EFTPOS card so they may withdraw or deposit funds from their bank account(s) at an Automatic Teller Machine (ATM.) These cards allow you to pay for goods and services using Electronic Funds Transfer at the Point of Sale (EFTPOS.) Your PIN essentially authorises a “wire” of money from your account to your merchant at the register (point of sale.)
What is important to note here is that EFTPOS runs on a parallel “network” to credit cards such as Visa or MasterCard. Depending on choosing “cheque, savings or credit,” your information to authorise your transaction is routed in a different way.
A credit card using your own money
Put very simply, a debit card authorises transactions across the various credit card networks. The point of difference is that it draws funds from a cash account, not a credit account. You must add funds to your debit card account; otherwise your purchase will be declined. A credit card account is a line of credit and is “spent” into existence. Your purchases will be declined if you hit your credit limit. With a debit card, you cannot spend what you don’t already have.
The benefits of a “credit” card without attracting interest
The debit card, for all your merchants and service providers know, is a credit card. It uses the same amount of digits and expiry dates as a credit card and uses a back-of-the-card Card Verification Value (CVV) for added protection. The only real difference is where it takes its money from. You can use your debit card in every same way you use your credit card. That means you can use it to purchase things online, over the phone or via mail order.
Debit cards enable use of PayPass and PayWave
MasterCard PayPass and Visa PayWave are based on smart chip technology and a digital communication method called Near Field Communication (NFC.) NFC is found in many applications such as proximity card readers at secure workplaces and even on your mobile phone so you can transfer files by “tapping” phones together. By “tapping” your card against a card reader, you can automatically authorise purchases. Right now, these purchases are capped at $100. Anything higher than that and you must enter your PIN.
Extra security and peace of mind
For those afraid to give your credit card details over the phone or online, a debit card combines the protection of your credit card network anti-fraud and verification services and the fact would-be scammers or skimmers can only take out what’s in your account. They can’t touch your credit account or bank account.
For example, you can transfer the exact amount of your purchase (including any surcharges), make your purchase and then have nothing in your account until you need it again. (Bank fees and charges may apply depending on who you bank with.)
It’s also handy if you need to limit your spending or are trying to avoid going into debts, since you can only spend what you already have.