A debit card looks like a credit card, and can be used for payments in much the same way as a credit card, but there's one major difference – you are paying with your own money, not the bank's money. Instead of racking up debt, which has to be paid off at the end of the month in order to avoid interest charges, you are simply using the card to pay with funds in your everyday bank transaction account or savings account.
The card is linked to your bank account, and you'll still get a monthly statement showing where your money went, just as you do with a credit card. But your Visa debit card or Mastercard debit card transactions will be listed along with all your other bank account transactions for the period.
Reduced risk of overspending
Although you can still overspend using a debit card, eating into your hard-earned savings or succumbing to impulse buying as soon as your salary hits your bank account, you're less likely to do so with a debit card than you are with a credit card. Firstly, if there are insufficient funds in your bank account your debit card payment is going to be rejected, and secondly, you're probably going to think a bit harder about whether you really need something when you're spending your own money.
Avoids long-term debt...
For some cardholders, one of the major drawbacks of using a credit card is the risk of getting into long-term debt. This can happen slowly at first, when your spending in a particular month exceeds your ability to repay your credit card balance in its entirety. Interest charges – at a high percentage rate – are added to the remaining balance, and in the following month the normal interest-free days on purchases are forfeited. New interest-bearing purchases make it even more difficult to repay the spiralling balance in full, and the stage is set for the cycle of long-term debt.
Compare this with paying with a debit card. You can only spend using money you already have. Although there are many ways you can still get into debt, using a debit card isn't one of them (unless it's linked to an overdraft facility).
... but you miss out on interest-free credit and rewards
Many credit card users, however, extract a great many advantages from their credit card without ever paying a cent in interest. They use the card issuer's money to make interest-free payments for up 44 or 55 days (depending on the card's terms and conditions), and then repay their balance in full every month. But you don't get to use someone else's money interest free with a debit card. You are using your own money, and forfeiting any interest you might have received on that money if you had left it in your bank account and used a credit card instead.
And Australian debit cards, with very few exceptions, do not come with the wide range of benefits attached to many credit cards. These credit card benefits come in the form of rewards or frequent flyer points, and complimentary perks like travel insurance. Although a small number of debit card issuers offer limited discounts and privileges for travel, dining, shopping and entertainment, or a capped cashback that may cover the monthly account keeping fees, or free wine with restaurant meals, or even frequent flyer points and travel insurance, they are the exception rather than the rule.
Alternatives to debit cards
What are your options if you don't want to use a debit card for payment?
You can also pay with:
- Cash. You need to withdraw cash from a bank account before you can use it. Carrying it is a security risk, and you end up with a pocketful of coins as change.
- Credit card. Can be a temptation to overspend and end up in debt, but a source of rewards and benefits if used wisely.
- Buy Now Pay Later (BNPL). The leading players are Afterpay and Zip, with all the temptations of a credit card, and very high fees if you are late with repayments.
- Prepaid card. Similar in may ways to a debit card (because you're using your own money, not the bank's), but the card is not linked to a bank account. Instead, a fixed amount of cash is preloaded onto the card. In some cases the card can be reloaded with more cash once the first amount is spent.
- PayPal. A useful alternative for online shopping, but you need to put money into your PayPal account first.
- Card linked to overdraft account. This is effectively a mix of a debit card and a credit card. If your bank grants you an overdraft, they may issue you with a card you can use to access the funds, by withdrawing cash or making purchases. Although it's called a debit card, you're not using your own money, and you will pay interest on the balance. (The use of the term 'debit card' in this guide refers only to cards linked to a non-overdraft account.)