When you use a debit card for a transaction, you are sometimes asked “debit or credit?” What’s the difference, and does it matter?
Some payment decisions are important. Like how you should pay for a purchase. In general, at least domestically, I suggest using a debit card for most purchases. It’s simpler, and you can’t get into debt that way.
Some payment decisions are complex. For example, when you’re in a foreign country and you’re asked whether you should pay in USD or the country’s currency. (There is a correct answer here, though.)
And another one of those payment decisions is when you’re using a debit card, and you’re asked:
“Debit or credit?”
If you’re confused, you’re not alone.
The question of whether you should run a transaction with a debit card as credit or debit is surprisingly unclear to most people. Honestly, up until recently, there were aspects of this question that were news to me.
So let’s quickly dig into what’s going on here.
Back in the day
Back in the day, there used to be an easy distinction between your cards. There were credit (and also charge) cards that allowed you to borrow money to pay for something later.
For other accounts, you had an ATM card. This allowed you to take money out of an ATM from your bank account. You could also, in some cases, use your ATM card at the point of sale. Enter your PIN, and it would withdraw the money from your account to pay for something.
But that wasn’t always available, and in that case, you paid with cash, wrote a check, or used a credit card.
Enter the debit card
In the 1990’s, debit cards became more prominent. These had a VISA logo on them, which meant that they ran on the same networks as VISA’s other credit portfolios. The system was the same.
This meant that you could use your bank account anywhere where VISA was accepted, which was mostly everywhere (ahem, Costco).
But this meant an odd twist of events. On the VISA network, you were running the same transactions as any other credit transaction on the VISA network. It didn’t matter that the back end held your money, and not a line of credit.
But you also had the ability to run a standard ATM transaction, which worked just like an ATM withdrawal.
We now had the ability to run the exact same transaction in two different ways.
So what should we do, and why?
Choosing debit
Running the transaction as a debit uses the Electronic Funds Transfer debit network. You enter your ATM PIN (and don’t sign). And because this is just like an ATM withdrawal, the money leaves your account instantaneously.
This is the option you choose if you want “cash back”, meaning that the purchase total is increased, and the difference returned to you as cash. This allows you to, in effect, use the merchant as an ATM, without having to pay fees.
And speaking of fees, a business doesn’t typically get charged for running a transaction as debit. So if you want to support the merchant, you may want to use the debit option.
Running as credit
Running the transaction as credit means that it uses the VISA network. You sign for the transaction instead of entering your PIN, though in some cases, you don’t even need to do that.
With these credit networks, money doesn’t change hands instantaneously, but instead takes a few days to process. (Note: I would not call this delay a benefit; if you are running that close to zero in your account balance, you might need a money reset.)
Technically, running the transaction as credit means that there is an enhanced fraud protection, as VISA claims “zero-liability” for things like card skimming. But in my experience, I think you’re unlikely to pay anything, especially if you report the fraud quickly.
And finally, the bank earns extra fees when you choose credit, which is why banks sometimes offer incentives for you to sign for a transaction. (The merchant will pay these fees.)
Finally, if you “tap to pay”, this will always be run as credit.
What to choose
Ultimately, the biggest decision is not whether to run your debit transaction as a debit or credit, it’s the choice to use a debit card at all. Using a debit card over a credit card gets you important benefits, such as keeping you from going into credit card debt, a simpler way to keep manage your money, and many other benefits.
Running your debit card as a debit or credit transaction isn’t a big difference. I tend to default to credit just because it’s quicker to cancel out on my entering the PIN part of the transaction. But with a small business I want to support, I may ask the clerk what they would prefer, and if they have a preference. You never know; they might.
But as for me, if you really want to know what I do: when I present my debit card and someone asks “debit or credit?” I say—honestly, I do—the following:
“Surprise me.”
Leave a Reply