Credit or Debit?

If you've handed your plastic card to a cashier when making a purchase, you've undoubtedly heard the question "credit or debit?" Most of us confidently answer one or the other, but in reality, we don't know or understand the difference between the two.

A straight credit card allows you to borrow money made available to you by a bank. The bank pays the payee, less a 1.5% to 3% charge, and in turn, you pay the money back to the bank after a period of time, plus interest. Usually, a signature is required. If you are using a straight credit card, your answer to the question "credit or debit?" will have to be "credit", or the transaction will not be processed. Credit card issuers generally provide benefits or rewards for using their card such as airline miles, extended warranties, purchase protection and disability insurance.

A straight debit card, a.k.a. "ATM" or "check card" will allow the bank to immediately transfer funds directly from your account to the payee's account, charging the payee a flat fee (usually 50 to 95 cents). A personal identification number (PIN) is usually required for security purposes.

However and here's the confusing part most, if not all, debit cards contain the Visa or Mastercard logo which allows debit card users to make purchases at merchants who only accept credit card transactions. Presenting a debit card and answering "credit" will make no difference to you, but will to the issuing bank, which makes more money for credit transactions than debit transactions (see above). For example, a $1,000 purchase from a merchant offering both options can net the issuing bank $15 to $30 if the transaction is processed through the credit system, but only 95 cents if processed through the debit system. To encourage the more profitable credit transactions, some banks will charge you a fee for debit transactions or offer product protection for credit transactions only. However, the money will still be deducted directly from your account, though it may take an extra day or two. Check with your bank which option affords you greater benefits.