Debit Cards

We’ve mentioned debit cards in several places—and will in several more, later. So, these cards are worth a mention here. They can play a role in the smart use of credit cards.

Beginning in the 1990s, Visa and MasterCard convinced most banks to “co-brand” their ATM cards as debit cards carrying either the Visa or MasterCard logo and a similar account number. This arrangement meant that ATM cards could be used at bank cash machines and like general-purpose credit cards at stores, hotels and restaurants.

Debit card sales aren’t credit sales, though. Essentially, the sales are like electronic checks—they result in a direct debit from the savings or checking accounts to which the cards are connected.

When debit cards first came into wide use, some financial experts warned that they posed bigger risks than traditional credit cards. In some cases, banks didn’t apply a credit card’s $50 liability limit to debit cards that were stolen or used fraudulently. But more recent banking industry practices and government regulations have extended the $50 limit to debit cards.

Many banks don’t require a particular credit score for a debit card; they issue the cards automatically to anyone who opens a new account. Others are more demanding, requiring a credit check or a minimum balance in order to issue a debit card; still others will issue a debit card after an account has been with the bank for six months or a year.

From a financial perspective, debit card charges are better than credit card charges because they don’t generate interest charges. And the cards aren’t susceptible to late fees, over-limit fees and other charges that can make a credit card expensive to use.

Of course, a debit card can cause problems in a checking or savings account. It’s possible to overdraft an account with too many debit charges…and some people find it more difficult to keep track of debit charges than checks or cash withdrawals. But, if you use a debit carefully, it can be a very convenient way to buy things.

And, because your spending limit on a debit card is set by the available cash in your accounts, you may find that the debit card comes with a built-in discipline that a credit card doesn’t.

There are some merchants that don’t accept debit cards. Most notably, the major U.S. rental car chains insist that renter’s have “true” credit cards. But this is an exception—most places accept debit and credit cards interchangeably.

For all of these reasons, it makes sense to use a debit card (or cards) as your first tools for daily purchases. This allows you to save your true credit cards for big purchases, emergencies and rental cars.

Next: Balance Transfers