Debit Card Debate: Check-Out Line Dilemma Reveals Real Differences

Confused about how to reply when you swipe your debit card in the checkout lane and the clerk asks, "Debit or credit?"

Many people believe the clerk is asking whether you're using a debit card or a credit card to pay for the transaction. But what the clerk really wants to know is how you want to verify your identity.

Choosing "debit or credit" also affects your rights as a consumer, card issuer and merchant fees, and sometimes even the checking account balance available for your next transaction.

Understanding the terms

When you use a debit card, some features are the same whether you pick the "credit" or "debit" route. Both transaction amounts are withdrawn from your checking account, the transactions contain fraud protections, and can be tracked using online banking or your monthly statement.

But there are important differences. The first is how you verify your identity at the time of the transaction. Choosing the "debit" option means you plan to prove your identity by submitting a four-number password, commonly known as a personal identification number or PIN.

Choosing the "credit" option means you plan to sign a receipt instead of entering a PIN. You get a copy of the signed receipt.

Paying by PIN is regarded as more secure because it's harder to guess or steal a password than to fake a signature. But paying by signature may be the only option available if the merchant doesn't provide a PIN pad. Paying by signature also protects you from potential fraud if you forget to shield your PIN from a person standing near you.

Merchant pressure

Merchants often encourage consumers to pay with a PIN. Card readers can be programmed to always ask for a PIN, for example, forcing consumers to take a few seconds longer to push a "credit" button or ask the clerk to enable a signature-based transaction.

Some merchants only accept debit cards if used with a PIN. These merchants prefer to have consumers use a debit card and enter a PIN because it lowers their costs when compared with signature-based debit and other forms of payment.

Credit unions prefer signature-based transactions because they earn higher fees when members choose the "credit" option. This allows the credit union to charge lower fees to members, or even to offer debit transactions for free.

Beware of hidden costs

You can be charged fees for either type of purchase. Some merchants charge a fee to consumers who say "credit" when paying with a debit card, while some credit unions and other card issuers charge a fee for some types of transactions or limit the number of free debit card transactions available each month.

Fee policies vary, so protect your pocketbook by carefully reviewing your credit union's rules. If you carry more than one card, bear in mind that credit unions typically charge the lowest fees when compared with other financial institutions.

It's wise to ask merchants about potential fees. You always can choose another payment type--or simply say "no" to a purchase to avoid fees.

Account holds may affect your purchasing power as well. A "hold" is an amount set aside in your account at the merchant's request to cover a pending debit purchase. Signature-based purchases can be held for hours or even days before they are withdrawn from your account, so some gas stations will put a hold of $50 to $75 on your account to make sure their transaction will be paid.

While most holds are removed in minutes, some holds for signature-based purchases may stay in effect for hours or even days, which means you'll have less money available for other debit card purchases.

Unique benefits

Each debit card option carries other unique advantages.

Choosing "debit" gives you: The quickest way to check out, in most cases. The ability to get cash back when you pay for your transaction. Access to self-service checkouts or merchants that only accept PIN transactions.

Choosing "credit" gives you: Access to more stores. Three times as many stores accept signature-based debit purchases when compared with PIN purchases, according to the Federal Reserve Bank of Chicago.

Test yourself

Tilly and Willy need cash, but they don't have time to stop at the credit union. Instead, they plan to get cash at the super-discount store. Credit or debit?

Debit. Consumers only can get cash back when they enter a PIN.

Claude and Maude want to buy gas. They usually pay at the pump, but this station's pumps lack a PIN pad. Credit or debit?

This one can go either way! Many people pick "credit" because it allows them to pay at the pump. But remember to factor in the account holds that allow gas stations to reserve as much as $75 of your account balance. If you can't afford the hold on your account or you plan to do other shopping, it might benefit you to take a few minutes more to walk inside and pay with a PIN.

The wallet Myrtle and Myron carry has only a debit card when they stop at a clothing store that displays the "Visa" and "MasterCard" symbols. The clerk tells them the store lacks a PIN pad but accepts credit transactions. Credit or debit?

You can avoid fees by choosing another payment type or saying "no" to a purchase.

Credit. Most stores that accept Visa or MasterCard credit cards also accept debit cards that carry a Visa or MasterCard logo. These transactions typically are authorized with a signature.

Betty and Freddy want to make a purchase online but don't have a credit card. Credit or debit?

Another tricky one! Most online merchants will accept debit cards. Be aware, however, that you have more protections by paying with a credit card, rather than a debit card. Many experts advise consumers to avoid using debit cards online to protect themselves from fraud.

Fran and Stan present their debit card at checkout when buying groceries. The clerk asks, "Credit or debit?"

Ask whether fees are charged for debit card use. If there are no fees, it's your call.

Published May 8, 2006