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When purchasing something in a store with a credit card or a debit card, the cashier may ask "credit or debit"?

I was wondering what the point is using a credit card in a "debit" way? How is it compared to using a debit card directly?

What is the point of using a debit card in a "credit" way? How is it compared to using a credit card directly?

Thanks!

9

These are two different ways of processing payments. They go through different systems many times, and are treated differently by the banks, credit card issuers and the stores. Merchants pay different fees on transactions paid by debit cards and by credit cards.

  • Debit transactions require PIN, and are deducted from your bank account directly. In order to achieve that, the transaction has to reach the bank in real time, otherwise it will be declined. This means, that the merchant has to have a line of communications open to the relevant processor, that in turn has to be able to connect to the bank and get the authorization - all that while on-line. The bank verifies the PIN, authorizes the transaction, and deducts the amount from your account, while you're still at the counter. Many times these transactions cannot be reversed, and the fraud protections and warranties are different from credit transactions.

  • Credit transactions don't have to go to your card issuer at all. The merchant can accept credit payment without calling anyone, and without getting prior authorizations. Even if the merchant sends the transaction for authorization with its processor, if the processor cannot reach the issuing bank - they can still approve the transaction under certain conditions. This is, however, never true with debit cards (even if used as "credit"). They're not deducted from your bank account, but accumulated on your credit card account. They're posted there when the actual transaction reaches the card issuer, which may be many days (and even many months) after the transaction took place.

  • Credit transactions can be reversed (in some cases very easily), and enjoy from a higher level of fraud protection. In some countries (and most, if not all, of the EU) fraudulent credit transactions are never the consumer's problem, always the bank's. Not so with debit transactions.

Banks may be encouraging you to use debit for several reasons:

  1. They don't share the risk (see fraud protection differences)
  2. They get to deduct the money right away, they may be paying the merchant later (depending on the contract between the merchant and the processor)

Merchants will probably prefer credit because:

  1. They don't have to maintain communication to processor at all times (although now with the Internet connections, it is less of a problem than when they had to make a phone call on each card).
  2. They can accept payments over the Internet and over the phone.

Consumers will probably be better off with credit because:

  1. Its better protected against fraud
  2. Easier to reverse transaction (dispute)
  3. Allows deferring the actual payment (credit cards only)
  4. Many credit cards offer rewards, very few debit cards do, and if they do - the rewards are much lower.
  • 6
    That's odd. Regarding who's promoting credit/debit, I thought it was the other way around. Our credit union told us to "Choose Credit" because then the merchant pays for the transaction. The merchants like debit more for the opposite reason. – mbhunter Sep 22 '12 at 5:54
  • @mbhunter well, the merchant fees will probably be lower for debit cards, that's true. They will also not be having charge-backs. I was aiming at why the merchants would not want debit cards. It depends on the kind of merchant, some don't care at all. – littleadv Sep 22 '12 at 6:22
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    I worry that the Merchants will probably prefer credit... bit is a guess at best, and likely wrong: credit companies often charge merchants up to 3% of every transaction, I image real money for them would trump the conveniences you list. – Shep Jun 5 '14 at 15:17
  • @Shep actually, fees for debit transactions are much higher when lower amounts are involved. – littleadv Jun 5 '14 at 16:09
  • @littleadv I've been having a hard time finding hard numbers on this one. From what I understand there can be a baseline fee for both credit and debit transactions, and credit always charges a flat fraction of the transaction. – Shep Jun 5 '14 at 16:12
3

It depends on your bank and your terms of service, but using the card one way or the other may affect things such as how long it takes to process, what buyer protections you have, etc. It also affects the store as I believe they are charged differently for debit vs credit transactions.

2

When using a debit card in a "credit" way, you don't need to enter your PIN, which protects you from skimmers and similar nastiness.

Also, assuming it's a Visa or Mastercard debit card, you now have access to all of the fraud protection and other things that you would get with a credit card.

The downside for the merchant is that credit card transaction fees are typically higher than debit card transaction fees.

I'm less familiar with using a credit card in a "debit" way, so don't have anything to offer on that part of your question.

1

Just to add about using debit card as "credit" vs "debit" way: In addition to the difference of having to enter the PIN when using "debit" mode (vs having to sign in "credit" mode), for stores that offer cash back (i.e. get cash out of your account at the same time as paying), you can only get cash back when using "debit" mode.

0

Credit in debit way - the card simply functions like a debit card for that transaction - pulling cash from your checking account. No difference.

You've simply discovered the fact that some banks are using the same piece of plastic for two functions, debit which draws funds directly from your checking, and credit which offers you time to pay a bill the comes in some time later. It's a personal choice.

  • Thanks! "Credit in debit way - the card simply functions like a debit card for that transaction - pulling cash from your checking account. No difference." Does it mean that a credit card can be used to withdraw money from an ATM and without interest generated from the day one of borrowing? – Tim Sep 22 '12 at 17:46
  • No, but if used as a debit card it can pull cash from your checking account. – JTP - Apologise to Monica Sep 22 '12 at 21:17
  • But for a credit card, I do not have a checking account with the credit card company, although I set up to pay my credit card bill from another bank's checking account. – Tim Sep 23 '12 at 1:44
  • If it's not linked to a checking account, it can't be used as a debit card, i.e. there's no account to debit from. – JTP - Apologise to Monica Sep 23 '12 at 2:50
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I'm surprised by all the pro-credit answers here, debit has some definite advantages.

Most importantly, when you pay with a credit card, the merchant pays around 3% of the transaction to the credit company. In many states, they are forced to charge you the same amount, and this is frequently toted as ''consumer protection''. But consider what this means for the business: they loose money for every credit transaction, and they're legally forbidden to do anything about it. So you're taking 3% from a business and handing it over to a massive cooperation.

To make matters worse, the buisness is inevitably going to have to raise their prices (albiet by a small amount), so in the end the average consumer has gained nothing. On the other hand, the credit card company wins big, and they use their profits to pay lobbyists and lawyers to keep these rules in place. To put in the worst possible light, it's essentially legal extortion, verging on corruption.

As for the fraud protection offered, while it may be true that credit cards will offer a more hassle-free reimbursement (i.e. you just don't have to pay the bill) if your card is stolen, consumer protection laws also extend to debit: in many cases your bank is legally required to cut you a check for all the money you lost.

  • "Most importantly, when you pay with a credit card, the merchant pays around 3% of the transaction to the credit company" As a customer, I really don't care. – Andy Sep 1 at 21:26
  • To put in the worst possible light, it's essentially legal extortion, verging on corruption - and how then would you propose that the issuing banks and transaction networks get paid for the services they provide, if they're not able to collect interchange fees? – dwizum Sep 11 at 19:55
  • @dwizum: One alternative is that the merchant can pass the interchange fee along as a separate item on the receipt. – Ben Voigt Sep 12 at 15:44
  • yeah this seems pretty obvious to me: if the business was allowed to charge customers for the credit transaction you could have an efficient system where the business charges what something costs and the credit company charges what it costs them. – Shep Sep 16 at 8:16

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