How Debit Cards Work

A debit card linked to an account containing federal emergency funds was one of the ways the U.S. government administered financial relief to victims of Hurricane Katrina in 2005. See more banking pictures.
Photo by Chip Somodevilla/Getty Images

There is nothing mysterious about debit cards. With their Visa and MasterCard logos, they may look like they're masquerading as credit cards, but they do not draw money from the same source as credit cards. Debit cards, sometimes called checking cards, draw funds from your checking account, not a line of credit.

Many debit cards are actually dual debit/credit cards. You can use them as one or the other. When you make a purchase with such a dual card, the card reader will ask whether you want to use your card as a debit or credit card. If you use it as a debit card, you enter your personal identification number (PIN) to authorize the transaction. You may also have the option to get cash back when you make a debit purchase. This is like accessing an ATM at the same time as your purchase -- you simply consolidate your transactions. If you use the card as a credit card, you put your John Hancock on a sales slip instead of entering your PIN.

As you can see, the basic process of a debit transaction is not complicated. But why would you choose to use a debit card instead of a credit card?

First let's compare debit and credit cards.