Our debit card is meant to be our trusty friend when it comes to money matters. When we need to make a purchase for goods or services, we know this reliable piece of plastic won’t let us down. You feel secure knowing that whatever you spend on your debit card is your money coming directly out of your bank account.
However, even friends can let us down. This supply of money isn’t endless and sometimes we can get a little carried away with our spending, especially with money we don’t have in our bank account. Careless use of our debit card can get land us into debt.
Follow our comprehensive guide as we answer all your questions regarding debit cards; how debit and credit cards differ; how you can get yourself into debt with a debit card; and what steps you can take to get yourself out of debit card debt.
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Debit card: What is it?
If you have a current account with a bank, then it is likely you will be issued with a debit card. A debit card is used for you to make transactions with, whereby the money is automatically taken out of your bank account.
Your debit card provides you with the flexibility not only to make transactions remotely but also allowing you to withdraw money from an ATM or cash machine using your debit card. All you will need to do is enter a Personal Identification Number (PIN) and the cash machine will feed the requested cash out to you.
How is a debit card different from a credit card?
As we are discussing debit cards, it seems only logical to talk about the other piece of plastic in the world of money. The credit card. Credit cards have always got a lot of bad press. We often associate credit cards with borrowing and debt. Abusing your credit card can land you into a lot of debt, however using it correctly can work in your favour. So how does it differ from a debit card?
Visually, both credit and debit cards look the same. They are both a piece of rectangular shaped plastic which include your name and identification numbers which are unique to that card. Even the back of the cards looks similar as they have a magnetic strip which is used to swipe or insert your card in at any participating card machines or merchants.
Most recently, credit and debit cards now have a contactless payment function making the ease of using your debit and credit card simpler.
During the Covid-19 Pandemic, people were encouraged to use the contactless function on their cards to limit contact with people and stop the spread of the infection. The contactless spending limit has now increased by £100, which makes frivolous spending much easier.
Credit and debit cards may look very alike but there are uses are far from this. Look at some of the differences below:
- A debit card uses funds from a bank account and a credit card uses funds from an authorised credit card company in which the money would need to be paid back later.
- A debit card usually has an agreed overdraft limit connected to the customers bank account in case there is any overspending on the account. However, a credit card has a specific amount of credit attached to it and if the customer tries to spend more than the spending limit then the card transaction is rejected.
- A debit card does not require a credit check before a customer is issued with it, however with a credit card, a credit check is needed to ensure that the customer is able to repay the money they have borrowed on the credit card.
Read more about how to get out of credit card debt here.
How do I get into debit card debt?
Unlike credit cards, debit cards aren’t meant to be a method of borrowing. With debit cards you tend to make payments on the funds you already have in your bank account. It is like having cash on plastic.
However, debit card misuse can happen when you pay for a product or service and there isn’t enough money into your account. This means your account will be overdrawn and this when the issues arise.
Being overdrawn will mean that fees and interest charges will be added to your account. They can rapidly increase especially as you are already struggling with the insufficient funds in your bank account.
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How can I cut my overdraft charges because of my debit card debt?
Did you know that when you are overdrawn on your account that sometimes the interest rates are almost double that of most credit cards? So as much as debit card debt may appear to be small pinch in your account, it is worth checking what the fees and the interest you are getting charged as it might be burning a hole in your pocket.
This why it is important to try and pay the debt as soon as possible. Here are a few pointers to help you do this:
Communication is key. If you are experiencing financial difficulty, you can speak to your bank and ask for help. They could offer you the following:
- Reduced overdraft interest rate
- Interest being cancelled
- A repayment plan to reduce your overdraft balance
- A personal loan to help you pay back the overdraft in affordable monthly payments
It is firstly important to understand how much you owe. Having a clear idea of how much you have become overdrawn can then allow you to budget and pay the debt off.
Meticulously, go through your income and expenditure and see if you have any disposable income to pay back the overdraft. If you have nothing left at the end of the month then it is time to cut down on your spending.
Download our handy budget planner and fill in the parts you need to understand your finances better.
Next step is to scrutinise your bills and outgoings. Do you really need a vast array of TV subscriptions? Can you live without eating out as much? Are certain luxury food items a must in your grocery shop? Cutting back and making those small savings adds more money into your pocket to help you pay off your overdraft and could possibly allow you to save more.
Emergency savings or a ‘rainy day fund’ is always a good thing to have, especially when unexpected costs arise. We don’t often advise you to dip into your savings but having an overdraft isn’t practical too. Why would you want to pay out money in fees and charges when you have the cash to pay it off?
Quite often we need think practically and do the Maths. You might feel like you have the security of an emergency fund but here’s the Maths bit:
You have a £1000 overdraft, and the overdraft is costing £30 per month. In a year your overdraft is costing a whopping £360. If you earn only £10 on your savings account in a year. Which one is better?
No brainer really. If you use your savings to pay off your overdraft you will be £350 better off as you won’t have an overdraft incurring charges leading you into more debt.
Once you have paid off your overdraft, you can start saving again for that emergency fund and this time hopefully be a little bit savvier with your spending.
Find out more on how you can increase your income and clear your debt.
Do this only if your current bank doesn’t provide you with a good overdraft interest rate.
If you can get a 0% money transfer card. It is like a credit card, but it will charge you a one-off fee, however during the 0% you won’t have to pay any interest. However, it is important to understand that you must pay the amount back so you can clear the card before you start to get charged interest.
The best way to do this is to set aside some money each month, ensuring at the end of your 0% period you have enough surplus cash to pay back the card. The key is to be disciplined because if you don’t set that money aside, you could be left with paying the credit card at a much higher interest rate after the 0% rate has finished.
As well as 0% money transfer cards, there are also certain banks that offer overdrafts that are significantly lower than what your bank is charging you. Shop around as app-based banks have very competitive rates compared to the traditional highstreet banks. Quite often it is half the interest rate your banks are charging.
Find out more tips on how you can beat the overdraft charges and get you out of debit card debt.
Does a debit card debt affect my credit score?
No. A debit card does not affect your credit score. Financial information like how much money you have in your current account, what your spending habits are like, what transactions you have made, do not generally get reported to the credit reference agencies.
It is your credit cards, that your credit reference agencies are more interested in as this is money that you have borrowed from lenders. Your credit card history provides future lenders as well as credit reference agencies an indication into how well you manage money and how sensible you are at paying it back. Find out more about how credit cards affect your credit rating.
That said, a debit card may not affect your credit score, but it may have an unfavourable impact on you getting credit in the future. The reason for this is because you have rarely applied or used credit so credit reference agencies do not know how well you will be when borrowing money and paying it back.
Find out more about how to improve your credit score here.
I am in debit card debt. Where can I get help?
Debit card debt can usually be a catalyst to your debt journey; however, it doesn’t have to be. If you find yourself in debt after using your debit card, then take note of the strategies used in this guide before you are straddled in a sea of debt.
Taking steps to manage your debt problem will help you stay out of debt in the future. However, don’t suffer in silence. If you are struggling with your finances and need support, then one of our advisors can help and guide you to finding the right debt solution for you.
