Most consumers understand the basic differences between debit and credit cards. One major difference is that credit cards are associated with building your credit score. Debit cards, on the other hand, don’t help your credit, but are a better option if you are likely to overspend (i.e. exceed your monthly budget) on occasion.
The distinction between credit and debit can get blurred, though, when you make a debit card purchase. The confusion stems from the fact that most debit card holders are given the option of paying for their purchase by either selecting “credit” or “debit” before swiping their card. To further complicate things, sometimes it is better to choose the “credit” option even though you are using your debit card.
What happens when you choose “credit” when paying with a debit card?
The end result is the same regardless of which option you choose. Gerri Detweiler, credit and small business expert and coauthor of “Finance Your Own Business: Get on the Financing Fast Track” explains that “the amount of the purchase will be deducted from your linked bank [checking] account” whether you choose credit or debit.
Beverly Harzog, a consumer finance analyst with U.S. News and World Report and author of “The Debt Escape Plan: How to Free Yourself from Credit Card Balances, Boost Your Credit Score, and Live Debt-Free,” adds that “when you select credit, it’s still a debit card transaction.”
Three related key points to consider:
- Some consumers assume that choosing “credit” means that the purchase will be treated like a credit card transaction, but this is not the case.
- It takes a bit longer for the money to be withdrawn from your account if you choose the credit option (see below), but you still must have money in your checking account to cover the expense regardless of which option you choose.
- Conversely, a purchase with a credit card is subject to a grace period, which means you typically have at least 21 days before you have to pay for the purchase. Grace periods are basically like an interest-free or 0% loan if you pay your balance in full each month (by the due date).
If you choose the debit option, you will normally be asked to enter your PIN number when checking out. However, you typically don’t have to use your PIN if you choose credit, but instead will be asked to sign your receipt.
Using your PIN is more secure, at least in theory. Detweiler notes that “I often hear consumers say that using a PIN is safer, but just because you use your PIN, doesn’t mean a crook who gets your card or card number must.” In other words, they could just choose credit when making a fraudulent purchase (and, thus, wouldn’t have to know your PIN).
It takes longer to process a debit card purchase if you choose “credit”
While the differences may seem minimal on the surface, there is a significant difference behind the scenes in terms of how a transaction is processed by the card companies. One major difference is the processing time.
Three related key points to consider:
- As noted above, if you select credit, there’s a lag or “float” time between the time of the purchase and when the funds are taken from your account.
- When you choose debit, the funds are removed in real-time.
- The advantage of choosing credit is that it gives you about two to three days before the money leaves your account.
The extra float time associated with the credit option may be tempting to misuse, particularly at a time when your balance is running low. You should avoid that temptation, though.
Detweiler cautions “I wouldn’t recommend trying to gamble on the float. If you don’t have the money in your account to pay for a purchase, it’s best not to use your debit card.”
Herzog adds that “it’s risky to float purchases that way. The best option is to stop spending and figure out why you can’t cover your bills. Put a budget in place and track your spending. This is a tough spot to be in, but give yourself some infrastructure and make adjustments with your expenses.”
While debit cards don’t charge interest like credit cards do, debit card fees can add up quickly. For example, if a debit card transaction is approved when you don’t have enough funds in the account, it will be because you have an overdraft line of credit associated with your checking account. If you have to utilize your line of credit, according to Detweiler, “it may result in an overdraft fee. Though those fees are dropping they are still expensive” and average around $35 according to the Federal Deposit Insurance Corporation.
It costs merchants more if you choose “credit” when using your debit card
One other major difference behind the scenes involves merchant interchange fees. These fees, which are currently a source of much debate, are basically what a business pays card processing companies for accepting your debit or credit card.
While this topic is complicated, the main thing you should be aware of as a consumer is that if you choose credit, the merchant you are doing business with will pay a bit more in fees to process your transaction. According to the Federal Reserve, the average debit card fee for 2022 was $0.34 per transaction, which equates to 0.74% of the purchase price.
On a related note, some debit cards offer additional rebates or rewards if you choose credit. In a nutshell, card companies are able to offer these rebates because of the additional merchant fees they collect when you choose credit.
Detweiler explains that “because the seller pays a little more for debit purchases to run as credit, your bank may offer some rewards on purchases, though debit card rebates aren’t generally near as common or lucrative as credit card rewards (which can offer up to 5% back on purchases).”
She adds, “If you value the debit rewards offered by your bank, then it’s fine to choose credit. Again, it’s less of a concern how you use the card, than how a crook uses it.”
Sometimes choosing credit can also reduce your fees. Detweiler gives a great example involving her credit union, which will waive her monthly service fee on her checking account if she makes 15 total card swipes or transactions. These swipes can be with a credit card and/or debit card transactions run as credit.
Can you build credit with a debit card if you choose “credit” at checkout?
As mentioned previously, one major advantage of a credit card over a debit card is that credit cards can help you build or rebuild your credit. Unfortunately, choosing the credit option when using your debit card will not help you or have any impact on your credit score. In short, choosing credit only changes how your transaction is processed and does not help you build your credit.
Detweiler points out that “as a rule of thumb, debit card transactions are not reported to the three major credit bureaus and therefore will not help you build credit.” However, she also adds that debit cards may eventually be able to help you build credit.
“Fintech products like Experian’s Smart Money Digital Checking Account and Debit Card may help you build credit by using that data to supplement Experian Boost (see below). However, it doesn’t currently help build credit outside that ecosystem.”
CardName also claims its debit card can help you build credit, though the annual fee is steep. Finally, Plaid, a platform used for a variety of financial transactions, has announced it has created a new legal entity that is a consumer reporting agency to help facilitate the use of cash flow data in lending decisions (which could include debit card transactions).
The bottom line is that there are certainly some exciting developments that we will likely see in the future. Having said this, currently, credit card and loan transactions are the best way to build credit according to Detweiler.
There are other services that can help you build credit. One such service is Experian Boost (Experian is a major credit bureau). Herzog explains that “Boost is a credit score tool that allows you to decide what type of bills to give Experian access to. When you apply for credit, Boost might be applied, but a few conditions must be met.”
She cautions, though, that Boost is used only for lenders that request a credit score from Experian. The FICO score, which most lenders use, doesn’t recognize this type of credit history when your score is requested from a different credit bureau.
Debit cards have several significant advantages, particularly if you are prone to carry credit card debt and/or exceed your monthly budget.
On the flip side, according to Detweiler, “if you can avoid carrying a balance, credit cards are superior to debit cards in the protections they offer. I’ve heard from many debit card users over the years who have been fraud victims and struggled to get money back in their checking account. Meanwhile, bills had to be paid.” She explains that “with a credit card, it’s the card issuer’s money — not yours — that’s at risk.”
If a debit card is the best plastic option for you, choosing “credit” or “debit” when you make a purchase is ultimately a personal choice.
Finally, you should also bear in mind that you can choose credit for one transaction and debit for the next. Similarly, a given purchase might be better if made with a credit card, such as an online purchase. Another type of transaction might be better if paid with a debit card.
You aren’t locked into one payment option. You have flexibility.