Debit vs Credit: What’s the Difference?

by Travis Pizel · 14 comments

“Debit or credit?”

It’s a question I’m asked every time I swipe my debit card — and which path I choose doesn’t seem to make much of a difference to me. I walk out of the store with my purchase, and the money is deducted from my checking account. But if we look under the hood, there’s a significant difference in what happens with each answer.

What’s the Difference Between Credit and Debit Transactions?

Online vs Offline Transaction Processing

If debit is selected, you’ll automatically be prompted for your PIN. This results in instantaneous verification of your code, as well as the deduction of funds from your account. This is called an online transaction.

By contrast, if credit is selected, the transaction is considered offline. You’re asked to provide a signature, which, at the point of sale, is harder to verify as a match than a PIN. The transaction goes through the credit card verification system and may take some time to complete. This is why transactions treated as credit may take a day or two to be deducted from your account.

Transaction Fees

Current laws cap the amount that banks can charge for debit card transactions at 21 cents + 0.05% of the purchase price, whereas credit card purchases are a little more variable.

Merchants negotiate a contract with a processing service that consists of two different types of fees:

  1. Discount fee of around 2% of the purchase price (which pays for the privilege of accepting that brand of credit card)
  2. Transaction fee of $0.15 to $0.75

Banks prefer you choose credit, because they can charge more per transaction. Merchants prefer you choose debit, because it costs less for them to process the payment.

Consumer Protection

The Electronic Funds Transfer Act (EFTA) limits debit card users to $50 liability for fraudulent use — if the card is reported lost or stolen within two business days. If you don’t report it in time, you may be on the hook for the full amount of the charges.

Major credit card companies require card issuers to provide zero-liability protection for fraudulent use, unless the card holder’s PIN was compromised. In that case, the consumer’s protection would fall back on the protection provided by the EFTA.

Personally, just the fact that debit card transactions put less money into the credit card company’s hands makes pushing the “debit” button very attractive. When added to the fact that the funds immediately come out of my account, it is a clear winner for me. Since I don’t have the opportunity to forget about the purchase, it seems more like spending cash — which helps me to manage my money better.

Which one do you usually chose: debit or credit?

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  • Alex @ CreditCardXpo says:

    Personally I like to use my credit card over debit whenever I can simply because I like the idea of using credit. It gives me more time to pay for the item especially for big ticket one, as long as I know I can afford to pay it off when the credit card bill arrives of course.

    • Travis @debtchronicles says:

      That works fine as long as your disciplined, Alex……in my case, what would happen is I would plan to have the ability to pay off the balance when the bill arrives, but then I’d spend it on something else. 🙂

    • Cyrus says:

      What exactly does that mean, “I like the idea of using credit?” If you REALLY can afford to pay for something, what’s the difference between paying for it right away and waiting 2-4 weeks for the credit card bill to come in the mail? If you don’t have enough of a financial buffer that 2-4 weeks makes a difference, you are living paycheck-to-paycheck and need more savings and/or buffer in your checking account.

  • Nate says:

    You’re kidding yourself if you don’t think merchants don’t already account for the credit card mark-up in their prices. Prices that everyone pays, regardless of payment method. Customers that opt for cash or (usually) debit-card transactions don’t get anything for this mark-up. By using a reward credit card, you are at least getting some of your money back.

    Combine this with the zero-liability fraud protection, and credit card transactions win, hands down.

    David – If you shop at Costco, you should really consider getting thier Costco AMEX card. Great, stable rewards. No reason not to have that, along with the business account.

    • Travis @debtchronicles says:

      I’m certainly aware that retailers pass along the credit transaction fee along to their customers in the form of higher prices. You’re talking about using a credit card with rewards – which is a different kind of animal than just using your debit card as credit. I’m refraining from using credit cards as much as possible. You may not be familiar with my story, but I don’t trust myself much with credit cards, thus I stick to cash and debit as much as I possibly can. thanks for sharing your thoughts!

      • Nate says:

        Travis – Not being comfortable with using Credit as opposed to Debit cards is one thing. I can understand completely how one person may prefer one over the other and how past history may inform that choice.

        But I was referring to where you suggest that, due to the fees card issuers charge merchants, that one might prefer debit as they aren’t as onerous to merchants. My point was that, while technically accurate, this isn’t quite the case. That merchants, instead of being penalized for accepting credit, are in reality getting a bonus from anyone using cash or debit due to that merchant’s efforts to account for credit transactions.

        Maybe it wasn’t a strong point you were making, and maybe I am picking nits, but there was something there that I felt needed clarification.

        My apologies, also, if my tone was a bit more confrontational that I intended. Didn’t mean to offend! 😉

  • David @ says:

    I’ve always used a credit card as much as possible because of the rewards, except at Costco because I only have a business AMEX and they don’t accept Visa/Mastercards.

    However, like I mentioned earlier, I may start using the debit card a bit more if it means less of a charge for a small merchant.

    • Travis @debtchronicles says:

      In the case when I’m using my debit card, and they ask the question I typically just say debit because, well, that’s what it is. But I can tell when it gets run as credit (like at a cash station pay at the pump), because it takes a few days for the transaction to post!

  • Cyrus says:

    I always select “credit” when I use my debit card. The zero liability fraud protection throughout Visa or Mastercard is SO much better than the protection for the debit/pin option. I’ve never noticed much delay in transactions posting to my bank account – it’s rare for a merchant to take more than one day. In my experience most transactions show up as a pending hold on my bank account within the hour.

    I’m not sure I agree with the “offline transaction” point – credit transactions get verified through the Visa or Mastercard network immediately and have nothing to do with the signature. Many transactions, including all online ones, don’t require a signature, and signature verification is up to the merchant.

    It’s true that credit transactions cost the merchant slightly more, but the bank doesn’t make much more than debit transactions because they have to split the fee with Visa or Mastercard. It’s their network and their fraud protection after all. My wife and I pay for most daily expenses like food, gas, and entertainment in cash anyway and order a lot of other stuff online where there’s no credit/debit choice and sometimes transaction fees are lower than brick-and-mortar merchants.

    • David @ says:

      Thanks for your insight Cyrus. You are right about the offline part, as most terminals that charge credit these days are basically online and doing transactions in real time. The offline comment is more of a technicality nowadays since in theory credit transactions can be done in batches that doesn’t happen as much anymore for most merchants.

      On the other hand, I was just at a car rental company recently and they wanted to make an imprint of my credit card to charge me later!

      Brings back memories of the good old days!

    • Travis @debtchronicles says:

      It might depend upon the retailer, and what processing company they use. I’ve had credit transactions take 3 days to show up in my bank account!

  • Adele says:

    I love being able to use my debit card. It took some getting used to (like water through a sieve at first!) but it’s a very convenient option.

    • David @ says:

      Plastic, whether it’s debit or credit, is definitely convenient. And now I know how debit cards may cost less for the merchant, I may start using it more for small businesses too!

    • Travis @debtchronicles says:

      I personally prefer cash…..but for larger purchases using a card makes more sense. Thanks for reading, Adele!

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