Many people carry both credit and debit cards in their wallets. Credit cards are nice in that they let consumers “borrow” money for 30 days or longer. Debit cards are nice in that they don’t rack up huge interest fees – purchases come directly out of people’s checking accounts, at no extra charge. There are no late fees involved, and debit cards typically come without the annual fees you find with most credit cards. Interestingly, more consumers today pay with debit cards than with credit cards.
That’s how consumers view the two. As for merchants, which kind of card would you rather have customers pay with – debit or credit? There’s a clear choice here.
Let’s cut to the chase – debit cards cost merchants less than credit cards. Here’s why.
The interchange rate merchants are charged for debit card transactions is substantially less than those for credit cards. This is due to a number of factors, chief of which is that debit cards are less of a risk. (Debit card transactions are deducted directly from the cardholder’s bank account, remember; the card issuer is not carrying any debt that consumers might not pay.)
These rates won’t change over time, either; the Durbin Amendment of 2010 caps interchange rates for regulated debit cards at 0.05% + 22 cents. (Plus processing company fees, of course.) Credit cards have no similar cap, so their rates may (and do) go up over time.
Given the choice, then, it’s to your benefit as a merchant for a customer to pay via debit card instead of credit card. It will save you money.
That’s not to say that all debit cards are charged the same rate. Rates vary depending on the issuing bank and other factors, just as with credit cards. In addition, how the debit card is used affects the merchant fees you pay.
A debit card used with PIN verification will have a lower interchange rate than one with signature verification. Typically a PIN verification is triggered when the customer chooses to pay via debit. If the customer selects “credit” when paying with a debit card it triggers signature verification, with higher rates.
That is somewhat balanced out by the fact that PIN transactions have slightly higher per-transaction fees; the per-transaction fees for signature verification are slightly lower.
Simplifying this, PIN transactions have lower rates but higher per-transaction fees. Signature transactions have higher rates but lower per-transaction fees. This makes PIN-verified transactions less expensive for large-ticket purchases, and signature-verified transactions less expensive for small-ticket purchases.
The bottom line? As a merchant, you should encourage your customers to pay with debit cards instead of credit cards. You’ll save money on each transaction.
FAQs
Debit card payments are usually better for merchants.
Even when charged as credit, debit cards will still be easier to handle.
Why do people prefer debit cards over credit cards? ›
Frugal consumers may prefer to use debit cards because there are usually few or no associated fees unless users spend more than they have in their account and incur an overdraft fee. (The no-fee advantage does not hold for prepaid debit cards, which frequently charge activation and usage fees, among other costs.)
Is it better to use a debit card or credit card? ›
Credit cards often offer better fraud protection
With a credit card, you're typically responsible for up to $50 of unauthorized transactions or $0 if you report the loss before the credit card is used. You could be liable for much more for unauthorized transactions on your debit card.
Why do some prefer using a debit card rather than a credit card 21? ›
Debit and credit cards both offer ease of use and protection against unauthorized transactions. However, credit cards incur debt while debit cards draw from your checking account. Before making your next purchase, compare the pros and cons of using a debit vs credit card to determine which is best for your situation.
What is the advantage for a merchant for using a credit card? ›
Transactions are processed quickly, reducing the queue at checkout points and keeping customers happy. Faster transactions mean quicker deposits into your bank account. Accepting credit cards, in general, leads to more consistent sales and deposits, smoothing out revenue waves and aiding with financial planning.
Why are debit cards becoming more popular? ›
J.D. Power surveyed more than 7,700 consumers in the United States between September and November 2023. The leading reasons consumers prefer to pay with debit cards include speed of transaction and the ability to track purchases and manage their finances.
What are the disadvantages of a debit card? ›
Disadvantages of a Debit Card
- You can't charge purchases with a promise to pay later: One of the benefits of credit cards is that you can make charges now with a plan to pay off the balance later. ...
- Large purchases can be a hassle: Some debit cards have spending limits that can complicate efforts to make large purchases.
Principally, the 50 percent of debit-card users who revolve credit-card balances would pay interest to charge purchases on the margin and hence might rationally choose to use debit rather than credit to minimize transaction costs.
When should you not use credit cards? ›
So, there may be times when it's best to put the credit card back in your wallet and pay with cash or debit:
- When you don't have a plan to pay the balance. ...
- When you're trying to pay off debt. ...
- When you're nearing your credit card limit.
Be aware of any convenience fees you'll incur by paying your bills with credit cards. It's best to use credit only for products and services that won't charge a fee, and using cash, debit or bank transfer for the rest. And, of course, use a credit card only if you know you can pay off the balance each month.
You'll never be charged interest
When you run your transaction as credit with your debit card, you are still authorizing a debit from your checking account. You'll never be charged interest or receive a bill for doing this. Of course, choosing credit at the point-of-sale will not help you build your credit.
Why choose debit card? ›
Debit cards allow you direct access to the liquid assets in your personal account, unlike a credit card which utilizes a borrowed line of credit extended to you by the card issuer.
Why is credit card a the better option? ›
Credit cards provide a level of safety for the user that a debit card and cash can't: fraud protection. If a thief uses your card, you can let your credit card company know and avoid being charged.
Do more people use debit or credit cards? ›
More people have debit cards -- but it's close
That's 93% of U.S. adults. Credit cards are also common, as 214 million U.S. adults (82%) had one or more in 2022. Overall, 28.7 million more Americans have debit cards than credit cards.
Do millionaires use credit cards or debit cards? ›
One of the reasons why millionaires use credit cards rather than cash or debit is because of the protection against fraud they provide. If a credit card is lost or stolen, your maximum liability for unauthorized purchases is $50.
Do more businesses accept credit cards or debit cards? ›
Credit cards accounted for over 27% of point-of-sale (POS) transaction value worldwide in 2023, and debit cards had over 22% market share—highlighting both payment methods' popularity. While credit and debit cards might seem similar to their users, businesses should be aware of their differences.
When shopping is it better to use a debit or credit card? ›
If you can control your spending to within a budget then it is best to use a credit card for everything and then pay it off every month. Most people can't do that so for most people the debit card is better for everyday stuff. If you're the type that will carry a balance on your credit card, use the debit card.
Do businesses get charged when customers use debit cards? ›
Do merchants pay a fee for debit transactions? Yes, you can expect to pay a fee for all debit transactions. The fees consist of a combination of the interchange and assessment fees that the card issuers and networks charge as well as service fees charged by your payment processor.
