When checking out at a store, a lot of people whip out their debit, or check, card. When we make payments with a debit card, we are often asked which type of transaction we’d like to make. The obvious affect is that if we choose debit, we have the ability to get cash back, but what are the differences between choosing “credit” or “debit” at the point of sale?
Either way, the funds come from the cardholder’s checking account, so the vast majority of people feel that there is no difference. However, there definitely is a difference and maybe you’ll think twice next time the cashier asks. Debit and credit transactions use two completely different processes using two different networks, and the consequences can be quite large.
When a cardholder chooses “debit” at the register, the transaction is processed immediately. When the cardholder authenticates the purchase using his PIN, the funds are immediately transferred from the cardholder’s account to the merchant’s account.
When a cardholder chooses “credit,” the transaction is processed offline. The merchant may process the card to receive an authorization, thereby guaranteeing that the amount requested will be paid. However, like a normal credit card transaction, the amount is not immediately withdrawn from the cardholder’s account. This doesn’t happen until the merchant settles all of its credit card transactions, at which time the purchase amount is charged to the cardholder’s checking account. This can take up to a few days.
Debit card transactions go through an Electronic Funds Transfer system such as STAR, which doesn’t offer the protection offered by VISA or Mastercard. “Debit” transactions can be disputed, but the process is much more lengthy and time-consuming. And if you don’t report your lost card in time, it could cost you big time.
In contrast, credit transactions go through the credit network, such as VISA or MasterCard, and therefore come with the additional security credit card companies offer.
Whereas credit card purchases are governed by the Fair Credit Billing Act (which basically means you have zero liability for fraudulent purchases, poor-quality or damaged merchandise, or for merchandise that was never delivered), debit card transactions are determined by the financial institution that issued your card. And we all know how much of a pain they can be to deal with.
Another difference is that when you sign for a credit transaction, banks get a much larger percentage fee from the merchant. So it may not make much of a difference to you in a transaction, but you better believe that the extra costs trickle down to you.
Readers, now that you know, will you choose “debit” or “credit” the next time the cashier asks?
Image from stevegarfield