Debit or Credit?

As I finished my Christmas shopping this past week, the “debit or credit” question at checkout is annoying me more than the longer-running “paper or plastic” inquiry. While I miss paper bags when it comes to carrying goods, I do not miss writing checks for payment at the cash register. Swiping my plastic check card is quicker and easier. But for some bizarre reason two alternative methods for processing the same transaction have evolved. In each case money is deducted from my checking account to pay the merchant. However, whether I say credit or debit, or more precisely whether I choose to identify myself with my signature or my PIN number makes a big difference on who pays the cost of the transaction and the risks I take as a consumer.

If I choose debit, the transaction proceeds much like taking cash from an ATM machine. A PIN number is required and after entry funds for the purchase are debited from my checking account along with an additional fee to pay for the transaction. It is not as costly as using a remote ATM, but it is not free. My bank charges me $0.50 for each transaction and that adds up quickly. If I make purchases at three or four different stores it would be cheaper for me to just go to the ATM and get the cash. It would all come out of the same checking account. After all, I’m not using actual credit.

If I choose “credit” the money also comes out of the same checking account, but a different set of rules apply. This is what I find so weird. I no longer pay the transaction fee because no electronic funds transfer takes place. Instead the Visa credit card network takes over and the merchant is hit up for the usual 2% to 3% of the purchase price even though no credit is extended. However, I have the protection of using a credit card meaning I can dispute charges and there are limits on my liability for fraud. In contrast, I have no protection for unauthorized PIN transactions. If someone obtains my PIN and check card numbers that person could drain my entire checking account and I would have little leverage for recovering the loss.

There is little reason for me to ever make a debit transaction at checkout. It is costly and risky to use my card in that mode. Naturally the store wants me to use debit because it is cheaper and safer for them. As a result all the machines are set up to prompt for a PIN number. To use credit I need to hit the nonsensical “cancel” button to move on to the credit option. No matter how many times I do this I still get confused by this step. The concept of “canceling” my purchase so that I can complete it just doesn’t sink in.

So are there ever any reasons to choose debit? Actually consumers who choose credit for gas, hotel, or rental car purchases could be in for a nasty surprise if their checking account balance is too low. The reason is that merchants selling open-ended purchases such as these typically place “holds” on the account for much more than the purchase price and these holds can last for days.

For example, suppose you intend to buy $25 of gas and swipe your visa check card. The computer doesn’t know your intention so it might automatically request an authorization for $50 to make sure you have the funds to fill up a large tank. In your checking account $50 is immediately set aside. You drive away with your $25 purchase, but the $50 set aside stays for several days. Over that time you could easily be writing bad checks because you keep account of your actual balance. Your bank has a different number—the “available balance”—that is less because of the funds set aside for the credit authorization.

You the consumer have no idea what number represents the “available balance” but you will be paying hefty bounced check fees if you overdraw on it. It’s all perfectly legal and just another excuse banks have for soaking consumers.

Joseph Ganem is a physicist and author of the award-winning The Two Headed Quarter: How to See Through Deceptive Numbers and Save Money on Everything You Buy