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Plan Well, Retire Well

Saving and investing your money

Debit or Credit?

The question you used to be asked at the grocery store was, Paper or plastic? Now it's, Debit or credit? And I'm convinced that most people don't know what the question really means. I almost got into an argument with one person when she claimed that she could use her debit card as a credit card. NOT!!! The problem is, the question is misleading. And the cards look almost identical, since most debit cards now have a VISA or MasterCard logo on them, just like credit cards.

When these store clerks asks "Debit or Credit," what they're really asking is whether you'd like your purchase processed as an online transaction, or offline. If it's online, you'll enter your PIN. If it's offline, you'll sign. Your choice does not change your debit card into a credit card. All it does is determine whether the purchase is deducted directly from your checking account (online and almost instantaneous) or if it takes a detour through the same processing system used by credit cards before reaching your bank (offline, which could take up to 2 days).

With a debit card, your choice could make lot of difference to the retailer, to your bank, and maybe to your own pocketbook. If you choose debit, the retailer probably pays somewhere between 25 and 50 cents to process the transaction. The retailer gets some small amount back (maybe 5 cents) and the bank makes a little money on it. But if you choose credit, the retailer typically pays a lot more to process the transaction (especially large purchases) and the bank makes a lot more on the deal.

So what have some banks done? They charge you for making "debit" or PIN-based purchases, thereby pushing you to make "credit" or signature-based purchases. Or, they might use the carrot approach instead of a stick, and offer you points for making "credit" transactions.

Remember this: Credit means you borrow money; that's a credit card. You'll get a statement of how much you've borrowed. Debit means it's a subtraction - in this case, from your checking account. That's a debit card. So when that store clerk asks you, Debit or credit?, smile sweetly and tell her either PIN or signature. Since it's the holiday season, be kind and don't confuse the poor soul by answering with either "Online transaction" or "Offline transaction."

More in a later post about when it's best to use which card. But here's a hint: If you're already carrying a balance on your credit card, stick with the debit card. You'll probably spend less and you'll have a happier New Year without bigger, uglier credit card bills.

Update: This post is one of many listed in the Dec. 8 Carnival of Personal Finance, a compendium of current blog posts on many financial topics. The current edition is Don't Go Broke over the Holidays.

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