Credit or Debit: Avoid the Hidden Fees

June 17, 2011, By Kasie Baltes 1 comment

Kasie Baltes

I am a shopping addict. I have no problem admitting it. Shopping is my favorite past time, and for better or for worse I have formed a slight dependence on that shiny piece of plastic etched with my name. My debit and credit card get a better workout than I do as I swipe them here and there in an epic quest for the best deal. To say the least, I certainly know my way around a store, but when it comes to checking out—one thing has always left me perplexed. Debit or credit? A simple question, sure. But why ask me when I clearly handed you my debit card? Does it matter? Am I paying more fees when I pick one or the other?

Brett King, bestselling author of Bank 2.0 and founder of Movenbank says that there is essentially no difference between the two for the buyer.

“The payment mechanism is essentially the same, except your debit card draws from what we call a DDA (Demand Deposit Account) versus from a credit card account, which is essentially a line of credit offered by your bank.”

So what this means for the cardholder is that the money is withdrawn immediately through the demand deposit account, while the charge could take a day to process through the line of credit.

Transaction Fees

While the buyer often doesn’t see the difference between picking one or the other—there are different fees associated with using debit cards.

“In respect to fees, the basic transaction fees are the same—we call these interchange fees, and they are fees that merchants are charged by the banks/card issuers,” says King. Typically the merchant covers the interchange fee out of the cost of the product or service.”

Although debit cardholders aren’t the one’s forking over the cash to cover these fees, a new rule is in the works by the Federal Reserve that would slash this fee for retailers, capping at 12 cents per transaction. The National Retail Federation states that the debit card fees currently range from one to two percent of the cost of the transaction, which would be further reduced.

While this debit card fee could considerably drop for the retailers, the credit card fees (typically two to three percent for retailers) would not, leaving possible extra perks for those who purchase items using debit verses credit. The retailers would be saving some cash, and the hope is that this savings would be handed off to the buyer making this transaction.

NEXT: The Risk of Paying with Debit