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Debit or Credit? What's the difference?

Ever wonder when you're standing in line at the store and the clerk asks you debit or credit if it matters how you answer?  And do you ever wonder why your debit card can be used as credit?

Well the first difference will be most obvious to you. When you choose debit, you will enter your PIN. If you choose credit, you will need to sign for a receipt.  Either way the funds come out of your checking account.

But what else is different? For starters, the transaction will take a different route depending on which you choose.

With the debit transaction, the funds will most likely settle through a regional network and will come out of your account almost instantly. And, that transaction is cheaper for the merchant so you will see them encourage you to do that. As a matter of fact there was a great deal of activity around this issue and Walmart a few years back. That's why in many cases the store doesn't ask, they just push you towards the debit option and you have to cancel the transaction or consciously choose credit to use that option.

With a credit transaction, those transactions go through VISA or MasterCard and although roughly 85% will settle the next day, the transaction can take up to three days to settle. A credit transaction is more costly to the merchant, but also earns the financial institution more income.

Some institutions offer rewards programs and they pay you for using your debit card. You'll want to understand the institutions program so that you can make the right choice at the checkout.  For more information on rewards programs, read my article from this summer.  For more information on debit card transaction processing, check out this article.

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