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Debit vs. Credit Card Detection

“How would you like to pay: through a credit card or debit card? You are often asked this question at grocery stores, restaurants, and shopping malls by merchants and shopkeepers. There is no denying that credit and debit cards do not only look similar, but they also allow you to pay conveniently without cash. Not only this, both credit and debit card are accepted at various different places, eliminating the need to carry cash.

However, despite all these similarities these two cards have different functions. More importantly, credit cards and debit cards have a great impact on your spending habits in a distinct way. One of the fundamental differences between a credit card and debit card is the account from where your card withdraws money.

To put it simply, a credit card charges money to your credit line whereas a debit card charges it to your bank account. For example, when you use a debit card for payment, the money is directly deducted from your bank account. You will have to enter your PIN number that is associated with the debit card you are using.

The PIN number is for security purposes. That means if your account has $450 and you bought a $500 item, your transaction is likely to go through a debit card.  But you will be charged an overdraft fee for insufficient funds, which is $50 in this case.

Credit cards, however, function differently. It is all about borrowing money from a credit card company to make payments for your purchased items. You get a specific amount of funds to spend when you use a credit card, which is often referred to as your credit card limit. Plus, if you do not pay off the balance amount when your billing cycle ends, your credit card company charges interest on your balance.

However, if you are an online merchant, knowing the difference between a credit card and debit card is substantially important. It is because the right choice determines how your purchase will be processed, its processing cost and how long will it take?

But before we plunge into this discussion, let’s understand what credit and debit cards are and how they are processed?

What is a Debit Card?

Although a debit card offers the convenience and balance of a credit card, it works in a different way. As mentioned earlier, debit cards draw money from a checking account when a purchased is made. Banks hold the amount spent on the purchased items. The transactions are then sent to the bank to be transferred to the merchant account. The process takes a few days to transfer the money.

At this stage, it’s important that the merchant keeps a running balance of his/her checking account. It ensures that the merchant’s account is not overdrawn. In general, a user gets a PIN to operate a debit card at different places, such as shopping stores. However, a user can use a debit card without a PIN number to conduct transactions with most merchants. Like a credit card, the user needs to sign a receipt to process the payment.

What is a Credit Card?

Typically, a credit card allows users to borrow money from a line of credit that is known as a credit card limit. It is used to make basic transactions that are later reflected on the bill. The noteworthy feature of a credit card that distinguishes it from a debit card is the interest that it charges you for the purchases.

However, if your balance is paid every month, there will be no interest. It is also important to remember that credit cards carry a high interest rate; plus, the history and balance of your credit card payment may affect credit card scores.

Credit Cards vs. Debit Cards

According to a study by Thomas Foscht published in International Journal, the choice of payment mode depends on customer satisfaction. A lot of other financial experts believe that credit card transactions have an edge over debit card transactions, particularly when it’s about choosing one electronic payment system.

Credit cards provide more benefits in processing certain transactions that include online shopping or renting a car. It is not only a safer option, but also easy to travel with.

In addition to that, some people argue that credit cards offer additional insurance on certain purchases. That is what makes it convenient when you are requesting a return. Here you need to understand the disclosure information about your credit card to make the most of its benefits.

Debit cards, on the other hand, offer the same convenience as credit cards without having to borrow the money from a credit card company. A debit card doesn’t provide you consumer protection like a credit card. Besides this, other than over-drawing penalties on the account, there is no hidden cost or fee on debit cards. This is unlike a credit card that charges you for over limit, annual membership fees and, sometime, late payments.

A lot of consumers believe that making purchases with a debit card is more like using real money that leads to great financial responsibility. If you are an impulsive spender, a debit card is undeniably a safer option.

Choosing the best electronic payment method is often difficult for people as both types of credit cards offer different advantages. For example, if you often face spending issues, it is always better to use a debit card as it helps you from excessive spending. However, if you want to enjoy reward programs, faster hotel reservations, or easy car rentals, using a credit card is the best option.

More importantly, if you are an online merchant switching from a cash-only business to one that works on credit, then credit cards are beneficial. A number of experts believe that credit card payments can increase sales linked to ‘impulsive buying’. It has the great potential to increase both the dollar amount and frequency of consumer purchase.

Final Thoughts

Overall, there is no doubt that businesses that accept credit cards often have greater advantages as it can boost sales. But that doesn’t mean you should not research all the cards processing methods to choose the best option.