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The Power of Plastic: Will that be Debit or Credit?

By: Lisa Laprade

If you’re one of the lucky millions of folks that holds a debit card with the Visa or MasterCard logo on the front, you’ve probably been asked; ”Will that be debit or credit” by the over zealous cashier or sales associate tallying up your transaction at your local store or fast food establishment. Come to think of it, you’ve probably been asked a few hundred times, and you’re probably unsure why they’re asking you this question or what the difference is.

To sum it up relatively quickly for you, when you reply with “debit”, you’re using an online transaction that basically communicates with your bank and takes the money out of your account. When you reply with “credit”, it’s an offline transaction that can take a few days to clear from your bank account.

So why do the stores care?

Whenever you use you debit card with the Visa or MasterCard logo, you have the option to use your card as a credit. When you choose the credit option (offline transaction), the store has to pay a fee, typically between 2% and 5% of the transaction amount, depending on the individual store and their credit card agreement. When you choose debit as your option (online transaction), the store still has to pay a fee, but a significantly smaller one, usually only a few cents opposed to the high percentage.

If you were the store, which option would you want your customers to choose, debit or credit? Obviously, you’d rather have them choose debit because each transaction is less costly for you. The percentage rate associated with the credit choice adds up quite quickly, as it’s merely a fee that comes directly off of your bottom line.

If you were the bank or card issuer, which option would you want your customers to choose, debit or credit? Banks and credit cards companies want you to choose credit because they get to keep the 2%-5% fee paid by the retailers. In order to persuade cardholders to choose the credit option, banks offer incentives like contests (especially around the holidays) for every time you use your credit card. Banks have also been known to penalize those who choose the debit option by charging them a fee for each online transaction, ranging from $.50 to $2.00. How much did that gallon of milk cost you now?

At any rate, because we live in a capitalist society, we have to expect corporations to make money. All of the transaction fees paid by the retailers will eventually be paid by you, the consumer, with higher prices on the products and services that you use each and everyday.