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?
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:
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.
