A debit card (also called a check card) looks like a credit card, but it functions like a combination ATM card/check. ATM cards are used to access – what else? – ATMs. ATMs allow you to do many banking transactions, such as deposit checks, withdraw cash, and check your account balance. For security reasons, when you insert your ATM card, you must enter your pin number. (Either you will be given a pin number when you receive your card or have to create one before you can use it.) Memorize your pin number, and do not share it with anyone or carry it in your wallet. You can use your debit card at any ATM, but be aware that if you use one that is not part of your financial institution's network, you may be charged a fee.
Like checks, debit cards allow you to pay your bills and make purchases in supermarkets, restaurants, and other stores. Many people find it more convenient to use their debit card than write a check, and, in fact, many stores today do not even accept checks. When you use your card, the cashier may ask, “Do you want to use debit or credit?” When you select the debit option, you are required to enter your pin number in a keypad. In some stores, such as supermarkets, you are also given the option of getting cash back. There is typically no fee charged for this service. When you select the credit option, you are required to sign the receipt, unless the purchase amount is very small. You are also given some protections that credit cards have. For example, if the item you purchased is defective, you can ask for a chargeback (a reversal of the charge to your account). Neither option is inherently better than the other, but because of the additional protection provided, you may want to choose the credit option for larger purchases.
Keep in mind that regardless of whether you choose the credit or the debit option, a debit card does not work the same way as a credit card. When you use a credit card, you are borrowing money from the financial institution that issued that card, and you pay it back at a later date. If you want to buy a $100 pair of shoes with a credit card, it does not matter if you have $100 the moment you buy it. (However, just because you can, does not mean you should use your credit card when you cannot afford to pay off the balance in full.) When you use your debit card, the money is immediately deducted from your checking account. If you only have $50 in your account, either the transaction will be denied or, if approved, your account will become overdrawn and you may be charged a fee.
Even if you use your debit card for most transactions, you probably will write checks at least once in a while. It is important to fill out the check correctly if you want to avoid having it returned to you. Always use a pen – this prevents someone from erasing what you wrote and writing in something different. In the upper right corner, fill in the date that you are writing the check. In the “Pay to the Order of” line, write the name of the person you are writing the check to. In the same line, after the “$” sign, write the amount of the check in numbers. In the line underneath, write out the amount of the check in words, and sign your name in the lower right corner. Filling out the memo line of the check is optional but recommended – most people list what they are writing the check for or, if paying a credit card or other type of bill, their account number. If you make any mistakes, write “VOID” across the check and fill out a new check.
It is easy to forget about a check once it leaves your hands. To prevent this from happening, take the time to note at least the following for every check you write:
- Check number (this alerts you if a check is missing in sequence)
- Date you wrote the check
- Who you wrote the check to
- What you wrote the check for
- The amount of the check
Furthermore, once the check is deposited and no longer outstanding, you should mark that as well. Most checkbooks come with a register where you can record your check information. If not, a piece of paper or computer spreadsheet will do the trick.
One very important difference between debit cards and checks is that when you write a check, the money is not deducted from your checking account immediately. The money is only deducted once the person you wrote the check to brings it to his or her financial institution and the check is sent to your financial institution. (However, there are special types of checks that are pre-paid, namely certified and cashier’s checks and money orders. These types of checks may be required when you make certain purchases.) Since the money is not deducted right away, is it okay to write a check for more than amount you have in your account if you expect to deposit more money in the next day or two? No. This is called “floating”, and it is an extremely dangerous practice to engage in. While in the past it commonly took several days for a check to be processed, checks today can be transmitted electronically and are processed much quicker. If the check is processed before you deposit additional funds, your check could bounce or your account could become overdrawn (discussed more in Chapter 4).
An electronic check (also called an EFT payment) is essentially a personal check that is written on-line. Many lenders, utility providers, insurance companies, and other businesses accept electronic checks. By using this method, not only are you saving yourself a trip to the post office, but you also do not need to worry about your check getting lost or delayed in the mail. When you write an electronic check, the money is immediately deducted from your checking account, just like when you use your debit card. In fact, the only real difference between using your debit card and using an electronic check is the information you are required to input.
In order to pay by electronic check, you must provide your routing number and account number. Sometimes a check number is also required. The diagram below shows where you can find this information on a check. Only submit electronic checks on secure sites (look for a web address starting with https or a lock icon), and remember to print out the payment confirmation page for your records.
Automatic debit is the opposite of direct deposit – every month (or another set period) money is automatically withdrawn from your checking account to pay a bill. Automatic debit saves you the hassle of having to remember to pay a bill, but you still need to make sure there is enough money in the account to cover the debit. For example, if your $1,000 mortgage payment is debited on the 5th of the month, you should have at least $1,000 in your account by the 4th of the month. This is a fairly easy task if the monthly payment is fixed (like for a mortgage or car loan), but can be tricky for bills that vary (like credit cards and some utilities). That is why many people only use automatic debit for fixed bills.
Like with direct deposit, starting automatic debit can be done by filling out an enrollment form. (Most businesses provide them on their website or will send one upon request.) It is a good idea to check your account the day after the scheduled debit date to ensure that it actually took place. Mistakes sometimes happen, and if the debit for some reason did not occur, you are still responsible for paying the bill. If you decide after enrolling in automatic billing that you want to cancel it, you usually can do so as long as you give enough notice.
Online bill pay
Many financial institutions offer the option of online bill pay. Instead of writing a paper check to pay a bill, you log into your checking account online and input the amount that you want to send to your service provider, lender, or whoever else you need to pay. Your financial institution will then either send an electronic check or print and mail a check for you. Using on-line bill pay through your financial institution offers convenience – you can pay your bills through one website instead of having to log onto the individual websites of every service provider and lender. To set up this service, you usually just need to provide your financial institution with the information that is on your bill, such as your account number and the company’s name and address. It is also a good idea to confirm with your lender or service provider that they accept online bill pay.