Banking: Debit Cards and ATMs

Debit cards and ATMs allow you to easily access the money in your checking account to pay for everyday purchases. In this section, we'll explain how they work.

Debit Cards

A debit card, sometimes called a check card (because it is similar to a check in that it allows you to access the money in your checking account), functions much like a credit card. It has a 16-digit number, four-digit expiration date, Visa or MasterCard logo on the front on the front, and three-digit security code on the back. It can be used like a credit card for purchases, with the major difference being that the money comes out of your account right away – you don't have the option of paying off your purchases later with a debit card as you do with a credit card. A debit card is useful for making purchases when you want the convenience of plastic (as opposed to cash or checks), but the savings of paying immediately with money you actually have – instead of accruing a balance on a credit card that you may not be able to pay off in full by the due date to avoid interest charges. (For more insight, see Credit, Debit and Charge: Sizing Up the Cards in Your Wallet.)

How are debit cards related to automated teller machines (ATMs)? Debit cards allow you to withdraw cash from your checking account through an ATM. To access your money this way, you'll need to use a personal identification number (PIN) that you establish when you open your account. The bank will often assign a PIN to you, which you can then change to a number that’s easy to remember. PINs provide an added layer of protection if your card is lost or stolen, so you should choose a PIN that would be difficult for someone else to guess. Memorize this number (definitely don't write it on your card), and never tell it to anyone. If you have to write it down somewhere, keep this information at home, not in your wallet or purse.

In addition to using your PIN to make ATM withdrawals, you may need it if you select the debit option to use your debit card to make a purchase at a store. If your debit card has a credit card logo, however, as most do these days, you may be better off selecting the credit option to minimize the possibility of a stranger watching you enter your PIN. In addition, some banks have a preference for whether you select debit or credit at the register when using your debit card to make a purchas. They may reward you for selecting their preferred option and/or penalize you for doing the opposite, so make sure to read the terms, conditions and fee schedule of your checking account agreement.

Some cards do not have 16-digit credit-card-like numbers and do not have a credit card logo. These cards can only be used to withdraw cash from an ATM and cannot be used to make purchases. These are known as ATM cards, rather than debit cards.

Starting March 31, 2017, Wells Fargo allowed its customers to make ATM withdrawals using only their smartphones – no card required.

ATMs

Automated teller machines allow you to make deposits and withdrawals without visiting a bank teller. Lines are usually shorter (or nonexistent), you can access your cash even when the bank itself is closed and there's no human interaction involved. ATMs can be found at banks, in grocery stores, in airports, in hotels, in clubs, in restaurants, in gas stations, in large retail stores, in convenience stores and many other places.

If you use an ATM at any branch of your bank, it will be free. Use an ATM at another bank or a store, however, and it could cost you. Generally, the company that owns the ATM will charge you a fee, and your own bank will also charge you a fee for using an out-of-network ATM. These fees will only be a couple of dollars each, but they can add up over the course of a month or year and are an unnecessary expense if you plan ahead. In 2016, Bankrate found that the average noncustomer ATM withdrawal fee was $2.90 and the average out-of-network withdrawal fee was $1.67, for a total average cost of $4.57 for using an out-of-network ATM. Some banks will waive a couple of these fees per month, and if you have an online checking account, you may be able to use almost any ATM without incurring any fees.

If you plan to use an ATM frequently, it might save you money to open your account with a major bank that has ATMs everywhere or to open an online checking account that allows liberal, fee-free use of other banks' ATMs. If, however, you're good at anticipating your cash needs ahead of time – or if you frequent stores that allow you to get cash back when you make a purchase with your debit card – ATM ubiquity need not be a factor in your choice of bank.

One drawback of relying on ATMs is their daily cash withdrawal limits. While you shouldn't have any problems withdrawing a large amount of cash from your account if you visit a teller, you usually won't be able to withdraw more than a few hundred dollars a day from an ATM. (Using an ATM also poses some risks. Learn more in 5 ATM Scams that Can Break the Bank.)

ATMs in the United States do not commonly run out of money; you can generally assume that any ATM you visit will have the cash you need. This isn’t always the case in other countries, however, as evidenced by India’s ATM cash shortages post-demonetization in early 2017.

Pros and Cons of Using Debit Cards

Debit cards are generally seen as an alternative to cash, checks or credit cards. Like these other spending options, debit cards have their advantages and disadvantages.

• Unlike credit cards, debit cards can help you stay out of financial trouble by limiting your spending to the amount of money that's actually in your account. However, if you're not aware of how much money is in your account – and how many checks and purchase transactions you have outstanding – it's possible to incur hefty fees for overdrawing your account. Banks commonly charge $35 per overdraft, according to Bankrate, though an overdraft of less than $10 might not incur a fee. (Learn more in What are the pros and cons of overdraft protection?)
• Debit cards generally do not offer as much protection against theft as credit cards. While you will usually not be liable for any unauthorized purchases made with your credit card, it is possible to be liable for $50, $500 or more in unauthorized purchases and withdrawals made with your debit card, depending on how soon you reported the fraud and how the fraud occurred. You must act quickly to report a lost or stolen card or PIN if you want to cut your losses. Sometimes, by the time you realize there's a problem, you've already lost a significant amount of money that you wouldn't be on the hook for with a credit card. Further, once the money is stolen from your account, it’s gone until your bank restores it. (For more insight, read Credit Card Perks You Never Knew You Had and Debit Card Fraud: Is Your Money at Risk?)
• Debit cards can be safer than carrying around cash, however. If you were to get mugged and you reported the theft of your debit card right away, your liability would be capped at $50. If you were carrying around $500 in cash, it would all be gone, and you'd have no way to recover the money.
• Unlike credit cards, the regular use of a debit card does not help you establish credit or improve your credit score. Also, debit cards generally do not come with certain perks offered by credit cards, such as rental car insurance and product satisfaction guarantees.

Transaction Limits

Your bank may limit the number of transactions or the total dollar amount of transactions you can complete in one day using your debit card. If you're planning to go to lots of stores – or make a large purchase using your debit card – you'll need to be aware of these transaction limits ahead of time. Consult your account agreement for details.

Holds on Funds

When you make certain types of purchases with your debit card, the company you make a purchase from may place a hold on more of your available funds than you've actually spent. The most common businesses that employ this practice are hotels, rental car companies and gas stations.

Rental car companies and hotels hold the extra money to protect themselves if you damage the car or the room. Many such companies will not even accept debit cards, since a high spending limit on a credit card can make it easier to recoup losses from customers in the event of significant damage. Gas stations place a hold because of the way they process debit card transactions. The hold amount is commonly $50 or $75 on top of your purchase amount and may not disappear for three to five business days.

It's essential to be aware of businesses' funds-blocking policies because you won't be able to access that money until the hold is released. Similarly, since the funds are not available, you can bounce checks you've already written if you're not aware that a hold has been placed on your account. To avoid headaches like these, pay in cash or use a credit card if you can when dealing with vendors that place holds on debit card purchases.

Next, we'll explain the fundamentals of managing your checking account, including how to balance your checkbook, bank online, avoid bouncing checks and more.