Debit Card Purchases: Is It Better to Choose Debit or Credit?

January 28, 2014

Once the grocery trip is over, the food is all bagged, and your debit card is swiped, the clerk asks, “Will this be debit or credit?” It seems like a simple question, but behind the scenes, your choice will have more impact than you think.

When you choose "debit" and enter your PIN (Personal Identification Number), the POS (Point of Sale) transaction becomes an Electronic Funds Transfer. The funds are taken from your account almost immediately. For the merchant, it’s as close to a cash transaction as possible (without actual cash).

Pros of Selecting "Debit":

Budgeting - The funds come out of your account immediately which can make it easier to manage your balances. If you are not the type of person to keep a register or you track your balances online or through mobile banking, you could see a more accurate balance from day to day.

Cash Back - Some merchants will give you the option to get cash back with your purchase which can be very convenient.

Help local businesses - Choosing debit and using a PIN can cost less to the merchant than signing for the transaction. Theoretically, if everyone did it, the merchant could pass that savings on to their customers and mark down prices.

Cons of Selecting "Debit":

Convenience - Some financial institutions will have a daily limit on PIN based transactions so after making a large purchase, you may be declined for cash at an ATM (Automated Teller Machine).

Fees - Some financial institutions will charge a fee similar to ATM usage fees. Others will structure your account fees based on usage. If your financial institution requires a certain number or dollar amount in debit card transactions to avoid a monthly fee, PIN based transaction may not count. If the funds are not available, your financial institution may charge you an insufficient funds fee. Make sure to ask your personal banker or read the fine print on your checking account disclosure.

Fraud - The more often you use your PIN, the more you open it up to potential compromise. The clerk could be using a scanner to copy card information, there could be a skimmer and camera on the gas pump, or the merchants network as a whole could be compromised, and unfortunately, it’s happening all too often.  Fraudsters would much rather get your PIN and go to the ATM for cash. It saves them the trouble (and risk) of buying expensive electronics and then having to sell them.

Liability - If you report the fraud within 2 business days, EFTA (The Electronic Funds Transfer Act) dictates that you are only liable for the first $50. If you notice it within 60 days you are liable for up to $500. After 60 days, the transactions are no longer disputable. EFTA also gives financial institutions up to 10 days to provide provisional credit to your account. So although you’ll get some of your money returned to you, it could take some time and you may have bills to pay in the meanwhile.

When you choose "credit" and sign for the purchase, it becomes a VISA transaction. The VISA network checks your account to verify the dollar amount and the funds are held for the merchant. The transaction can clear the same day or may take a few days to post to your account.

Pros of Selecting "Credit":

Rewards - Some financial institutions will offer rewards programs for using your debit card. Those rewards normally only apply to signature based transactions.

Fraud - Signature-based fraudulent transactions that are disputed can be charged back to the merchant who took the card in the first place. PIN-based losses are taken by the financial institution which, one way or another, are eventually charged back to you, the customer.

Liability - VISA offers $0 liability on signature-based transactions. That means that if fraud occurs, you aren’t held liable for any of it as long as you report it within 60 days of receiving your statement. VISA also dictates that provisional credit is given within 5 business days although most financial institutions will credit you within 24-48 hours.

Cons of Selecting "Credit":

Fees - If you do not have sufficient funds and have opted into a Courtesy Pay service at your bank or credit union, the transaction may be approved and you could be charged an overdraft fee. Basically, your $6 mocha frappuccino can very quickly become a $41 mocha frappuccino without you realizing it.

My recommendation? Choose credit whenever possible. Although I am all about supporting local business, I find it unlikely that prices will really be lowered if we all choose debit. I’m also not willing to give up the protection of a signature based transaction to try to help them out.

You can also protect yourself by taking advantage of mobile or online banking and monitoring your account. Balance your checkbook against your statement or, at a minimum, review your statement every month. Minimizing losses by catching fraud early helps save money for both you and your financial institution and limits your liability.

To protect yourself even further, take some time and research the fees and policies at your financial institution. For example, I know that my credit union has no fee for POS transactions and no overdrawn debit card fee. I know that they offer $0 liability on all debit card transactions (regardless of how they’re processed) as long as they’re disputed within 60 days. Not every bank or credit union does that.

This post was written by Chris Hardenberger, a branch manager at Westerra Credit Union. If you'd like to submit a guest post, email us at