How Exactly Does a Debit Card Work?
Debit cards have become a popular way to pay for just about anything. They work similar to a credit card. With a debit card, the bank withdraws the money from your checking account when you use the card for payment. You never pay interest, and if the money is not available, the payment is not authorized. It is good to know exactly how a debit card works.
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Processing System
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Credit and debit card processing systems join the banks, the merchants and the network operator. They can work with a PIN or without. When the merchant's credit card terminal transmits a transaction to the cardholder's bank without a PIN, the bank verifies that the funds are in the account, and sends a message to authorize the transaction. The money is then taken out of the cardholders account and transferred within a couple of days. If the merchant sends the transaction with a PIN, the transaction is authorized by the cardholder's bank, and the money is taken out of the account immediately.
Processing System During Settlement
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At the end of the day, the merchant submits a batch transmission to a central clearing house. The clearing house will prepare a list of the money that they need to withdraw from each of the accounts, and groups it by bank. The bank then transfers that money from each cardholder's account to the clearing house, and the bank sends the money to each of the merchants. These transactions are sent in large bundles or batches, which makes the process go quickly.
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PIN-Based Transactions
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Your personal identification number, or PIN is the best protection for you on your debit card. If someone finds your card and it only requires a signature, just about anyone could find your card and use it. The PIN works as an electronic signature. If you keep the number secure, you will have no problems.
Blocking
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A big problem with debit cards is blocking. Blocking is when a merchant places a hold on your debit card for the amount of a transaction that has not been completed yet. A good example of this is when you rent a hotel room. Often, the hotel operator will place a deposit on your debit card equal to one night's lodging, although the policies vary between organizations. The problem with a debit card is that this money is held out of your checking account and can cause other transactions to bounce. If you are using your debit card, don't be afraid to ask how much is held, and when the hold will release.
Fraud Protection
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With just a few exceptions, a debit card has all of the same safety against fraud features that a credit card comes with. If you notify your bank within two business days of finding out your card was missing, the most that you will be liable for is $50. If you notify the bank up to 60 days, your liability increases to $500. Go longer than 60 days without notifying the bank, and you are liable for everything charged.
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- Photo Credit credit card terminal image by Igor Zhorov from Fotolia.com
