How Does a Debit Card Work?
A debit card is linked to your current/checking and/or savings accounts - in banking terms, deposit accounts. When you use a debit card either for cash withdrawal or for purchases at point of sale, money is directly subtracted from your deposit account.
In contrast, a credit card is an unsecured loan that a financial institution provides to you as a payment convenience. Using a credit card means that you intend to repay the amount plus interest, if you do not repay the balance in full each month.
PIN-based debit cards:
You need to key in your PIN at the time of sale. These PIN-based debit cards can only be used at merchants that are equipped with online card processing terminals attached with a special device for keying in your PIN.
Signature-based debit cards:
You sign a receipt for the purchase, as you would with a credit card. Signature debit cards can be used at merchants with online card processing terminals as well as those with offline terminals.
Some debit cards are designed to work with a PIN only, others can be used with either a PIN or a signature. Cards that can work on the signature method may offer more flexibility, especially when dealing with merchants who do not have the equipment needed to process PIN transactions. Check with your local financial institutions which types of debit cards are offered.
In either case, the funds are automatically deducted directly from your account.
For both types of debit cards, you will need a PIN for cash withdrawal at ATM. Your bank may assign one to you when your card is issued.
Why Are They So Popular?
All it takes is a bank account
Debit cards represent a significant step on the road to a spending-based-on-convenience economy. They are perfect substitutes for cash and checks, all you need to get a debit card is to have a bank account. In Asia Pacific alone, an estimated 500 million people with bank accounts are eligible for debit cards while 100 million people are estimated to be eligible for credit cards.
An effective money management tool
An increasing number of credit cardholders are also using debit cards for more effective management of their daily expenditure. Typically, these savvy card users will put their everyday expenses and regular payments such as groceries, utilities bill, recurring monthly payments or other small ticket items, on their debit cards. While the higher value items, major purchases that are to be financed in installments or expenses incurred during overseas travels will go on their credit cards.
Convenient and widely accepted
A debit card is also one of the easiest ways to facilitate electronic transactions because of its convenience and wide acceptance. For example, some international signature-based debit cards are accepted at over 20 million locations worldwide.
Convenience is another reason for the burgeoning popularity of debit cards. With a debit card, you don't have to carry cash or checks. The cards are easy to use, quickly processed at checkout, and provide a detailed record of all your transactions on your periodic bank statement.
Safe and secure
The same security safeguards for credit cards also apply to debit cards. If you lose your debit card or believe it has been stolen, call your bank to report the loss immediately. That will prevent anyone else from using it, and reduce any losses incurred. Any consumer protection provided by your issuing banks is not a license to be careless with your card. Debit cards are like money in the bank and should be carefully guarded.