A debit card looks like a credit card. But that resemblance is superficial. A debit card, which your bank or credit union provides when you open a checking account, is linked directly to that account. 

When you use the card and your personal identification number (PIN) to withdraw cash at an ATM, the amount is subtracted immediately from your account balance. The same thing happens when you use the card to make an online or in-person purchase. 

Sometimes, when you swipe, insert, or wave the card at a point-of-sale (POS) reader, the debit is almost instantaneous. In cases when you sign your name, as you also do with a credit card, it may take longer for the amount to be debited from your account. 

You might prefer using a debit rather than a credit card to help keep your spending under control. But there’s a catch. Your credit union or bank will offer you overdraft protection on your debit card. So if you spend more than your account balance—say to pick up pizza for your team—the purchase will be covered and you avoid the embarrassment of having your card rejected. 

If the overdraft kicks in, however, it works the same way as it does with your checking account. The bank or credit union transfers money to your account and charges interest on the loan. Often there’s also a fee for each overdraft, which can be more expensive than the purchase you made. The real danger, though, is how easy it is to overspend and rack up unwanted, expensive debt. 

So it’s smart to decline overdraft protection on your debit card when your institution asks your agreement to provide it, which they must do by law. All you have to do is say no. Declining this protection will not affect the coverage you have for your checking account. 

One of the risks of using a debit card is unauthorized use. True, to make ATM withdrawals, someone would need to know your PIN, which you can protect by not sharing it with anyone but your spouse. You can also be careful not to write it on the card or on a piece of paper in your wallet. 

But there are lots of ways someone could make unauthorized charges if they had your card or just its number. Signatures are rarely checked, and when you use a debit card on the phone nobody asks you to prove your identity. 

The law does protect you in case of misuse. If you notify your bank or credit union that your card is missing or has been used without your permission within two business days of discovering the loss or fraudulent use, then the most you can lose is $50. And most credit unions and banks limit your loss to $0. But if you wait more than 60 days to report the problem, your possible loss jumps to $500, plus everything that’s withdrawn on the 61st day and after. 

On top of that, if a substantial amount of money is gone from your account, you may find yourself in an overdraft situation while you wait for the money to be restored. If you’ve filed a written report, your bank or credit union has ten days to investigate your loss and refund your money. But if you haven’t, it may extend the investigation for up to 45 days. If your account has been open for less than 30 days, however, the credit union or bank may extend the investigation even longer, leaving you without the money. 

A prepaid debit card isn’t linked to a bank account. Instead, you load money to the card at the retail or financial institution that provided the card or arrange a transfer or direct deposit. When the balance is gone, you reload. 

The advantages of prepaid cards are that you can use them to make purchases but it’s harder to overspend since there’s no overdraft option. A potential downside is that the fees on some—but not all—prepaid cards consume much of the amount loaded to them. Others may not refund your balance if the card is lost or stolen. You’ll want to compare card terms before you choose one. 

Using a debit card may pose other risks, where your losses are not protected. For example, if you use a card to make an online purchase and the product is defective or never shows up, you’re plain out of luck. If you’d used a credit card instead, you’d have the right to dispute the charge rather than fighting the seller yourself. 

If you use your debit card to reserve a hotel room or a rental car, that amount is frozen and no longer available in your account. When you settle your bill, the actual amount is debited too. So you’re out double the amount until the original charge is lifted, which could take days. 

You should also think twice before making online purchases with a debit card. If anything goes wrong with the transaction, especially with regard to security, your entire account could be vulnerable. The same applies to authorizing recurring payments with a debit card. Once the money has been debited, it’s almost impossible to recover. Here, too, a credit card is a better choice. 

This Money Briefing is part of the Defense Credit Union Council (DCUC) “Armed Forces Financial Guide,” which you can download for free in English and Spanish.

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