How many times have you been at a checkout counter and have been asked these simple words: “Credit or debit?” when you swiped your bank card, and thought, “What’s the difference?” or, “Why should I care?”
It turns out there are differences in the way a transaction is processed, and each have implications for you as well as the retailer accepting the card. Unless your bank charges a fee for debit transactions, the differences to you may only become clear if something goes wrong.
Purchases made using the credit option provide a greater amount of consumer protection, but how does that work?
Debit transactions are considered online transactions in which the funds are automatically deducted from the associated checking account. The buyer enters their PIN into a point-of-sale machine and the transaction is quickly reconciled through a processing company like NYCE or Star. In a credit transaction, funds are placed on hold until the purchase is settled through the processing network like Visa or Mastercard.
If everything goes well with the purchase, you may not notice the difference, other than when the money is actually deducted from your account. But let’s say you purchase something from a retailer who directly guarantees the product, and you get it home and it stops working and the dealer won’t honor a return. Or you discover the seller has made misleading claims about the item, and won’t issue a refund when you try to return the product. What are your options?
By selecting the credit option, the transaction is processed through a company like Visa or Mastercard, and your purchase is protected as long as your account is in good standing and you can show that you acted with “reasonable care” in making the purchase. A dispute can then be opened on your behalf by the issuing bank, and there is a reasonable chance you will get your money back. With a debit card purchase, the buyer is responsible for up to $50 of the transaction, and it must be reported within two days.
Another drawback to using a debit card exists when making gas purchases at the pump, especially if the funds in the associated bank account are slim. The problem: you can actually be charged for more than your purchase, at least temporarily.
When you swipe your card outside at the pump, gas stations will put an automatic hold on cash in your account to ensure payment for the purchase before a drop of gasoline has been pumped. A hold of up to $75 can be placed for up to three days after a purchase, even if the purchase was for only $10 of gas. In the mean time, checks could bounce or ATM withdrawals could be denied if the hold is close to your balance. This is also the case when securing a car rental or hotel purchase ahead of time, and for much larger amounts of money.
This situation at the gas pump can be avoided by going inside to make the purchase, or selecting the credit option at the pump if it is available. If renting a vehicle or staying at a hotel, make sure you know exactly how much of your money will be on hold, and plan carefully if you’re not using an actual credit card for the purchase. With an actual credit card, the purchase isn’t charged until you check out or return the card.
So why is the option to use a debit card as credit not always an option at point-of-sale machines? The ability for a merchant to be able to accept debit and credit cards comes at a cost to the merchant. Debit purchases are less expensive for the retailer, often as little as ten cents per transaction. This is why many merchants encourage debit transactions or make the credit option harder to find. Some merchants, especially those dealing in very low-priced goods, will only take debit cards to avoid the fees incurred to accept them, which can be as much as 2 percent of the purchase amount.