Debit cards are sometimes confused with credit cards, because they look the same and are used in the same manner. However, debit cards are truly different and it can help to see how a debit card works, in order to understand how it can best be utilised.
Debit cards usually don’t have an account of their own, but instead are reliant on a primary account with a bank or other financial service provider. Because this account can be of almost any variety, debit cards are now offered by a wide variety of financial institutions that never offered them before.

The debit card essentially accesses the funds that are within the account, rather like a plastic cheque. When funds are available, the debit card simply allows the shopkeeper or service provider to have those funds transferred to his or her account. It won’t let the shopkeeper or service provider do any more than this or access any more information from the bank account, such as the balance.

As mentioned, debit cards can be associated with all sorts of varied bank accounts. Most transaction accounts offer debit cards, and it was originally envisaged that this would be an exclusive arrangement, as debit cards were seen as a replacement for chequebooks. However, the accounts that now offer debit cards include home loans, lines of credit, brokerage accounts and savings accounts.

Because debit cards are associated with underlying accounts, accessing those funds directly, they don’t carry a direct interest rate, unlike credit cards, which have their own accounts. The credit card holder runs up a balance on this credit card account, and then owes money to the card provider, which charges interest on the balance, same as any other loan, until the total has been repaid.

Both debit cards and credit cards charge merchant fees to shopkeepers and service providers for processing the transaction. These charges are a percentage of the transaction amount. It’s for this reason that debit cards are offered with so many bank accounts, as they are essentially free at the point of use to the debit card holder as well as the debit card provider, instead earning their profits from the merchants accepting the cards.

Debit cards and credit cards also use the same payment system, and so debit cards are accepted at all the same places as Visa and MasterCard.