Debit or Credit? (using plastic - and bankers make more $$$$$)
Debit or Credit?
When you purchase with plastic you’re often asked if you’d like to make it a debit or credit transaction. What’s the difference? The choice you make determines how your purchase is processed, who pays the bill for that processing, how long it takes, and what your rights are. This page covers how interchange fees work and just how important your choice is.
Is it Debit or Credit?
When you use a debit card, you can sometimes choose how the purchase is processed. It can either be an online transaction or an offline transaction. If you punch in your personal identification number (PIN), it’s an online transaction – it gets completed electronically and it’s done pretty quickly. If you don’t use your PIN and you sign a charge slip instead, it’s an offline transaction. Offline transactions are processed much like plain-vanilla credit card purchases.
Even though you use a debit card, offline transactions are very much like credit card transactions. Your debit card might have a Visa logo on it, for example, so it runs through the Visa network. It’s not a credit transaction, but it uses the same infrastructure.
In summary, when you’re using a debit card:
- Choosing “Credit” makes it an offline transaction
- Choosing “Debit” makes it an online transaction
Who Cares?
So far, you may be unimpressed. Who cares how each transaction is processed? You might not, but banks and retailers do. When you do an offline transaction and simply sign a charge slip, the retailer has to pay a small percentage of your total purchase – perhaps 2%. This fee goes to the bank that issued your debit (or credit) card as an interchange fee.
What about online transactions? Retailers can get those done for a lot less. They might only pay 10 cents or so per transaction.
As you might imagine, 2% of every purchase adds up to a lot of money. The banks and credit card companies would love for you to choose credit because they get 2% of every dollar you spend. Retailers, on the other hand, beg to differ. They’d prefer that you choose debit so that they don’t have to pay a hefty interchange fee.
In order to maximize revenue, banks give you an incentive to choose credit (or a penalty for choosing debit, depending on how you look at it). They may charge you a fee for online transactions – usually in the ballpark of one to two dollars. Once you discover these fees, you’re more likely to choose credit next time. In addition, they may offer rewards (such as airline miles or entry into a sweepstakes) each time you choose credit.
Of course, somebody has to pay the 2% interchange fee. Retailers don’t pass it on to you as a transaction cost. However, it has to come from somewhere – they have to build it into the price of the products and services you buy.
Choosing to buy in a debit or credit transaction also affects your bank account.
If you’ve ever paid for gas at the pump, you know that you swipe your card before pumping gas. The machine doesn’t know how much gas you are going to buy. As a result, it has to take a wild guess. It checks to see if you have at least $50 or $100 available in your account – in other words it authorizes a purchase. If authorization comes back, the retailer “blocks off” that $50 or $100 so you can’t spend it elsewhere.
You might only by $10 worth of gas. Nevertheless, $100 will be blocked off for several days. In a worst case scenario, you’ll end up bouncing checks even though you have the money – it’s just “not available”. This means that if you use your debit card for everyday purchases, you need to be careful. Two ways to protect yourself are:
- Keep extra cash in your checking account
- Use your PIN if you don’t have extra cash in your checking account
Note that using your PIN will make the transaction clear your account more quickly. However, there is a security issue. By entering your PIN number, you run the risk that somebody else will discover it. Thieves (or a hidden camera) may see which numbers you hit on the keypad, or the retailer’s device could give up your pin number – whether on purpose or by accident.
If your PIN number is compromised, scammers have direct access to your checking account. This is pretty scary! They can spend that money, or they may even create a fake ATM card make withdrawals. If they drain your checking account, you won’t be able to pay important bills. Of course your account may be protected from fraud, but you’ll have to go through some harrowing days or weeks without any money while the issue is resolved.
http://banking.about.com/od/checkingaccounts/a/debitvscredit.htm