Debit or Credit?
The Savvy Answer Is......Swipe your debit card, then hit "credit." You'll find the pen is mightier than the PIN.
(MONEY Magazine) – Debit or credit?" When a cashier asks you that inevitable question, the natural response is to dutifully report which kind of card you're about to swipe.
Certainly there's nothing wrong with using a credit card--it gives you the privilege of paying later. There's value in holding on to your money for the grace period between the day you charge and the day your monthly bill is due. If you pay off your balance each month, a credit card is in effect a short-term, interest-free loan.
But even if you're using a debit card, the smart answer is usually "credit" anyway. Here's why:
Whether you select "debit" and punch in your PIN or select "credit" and sign for the purchase, the money will be deducted instantly from your checking account. You pay as you go, avoiding the debt that can easily pile up on a credit card. This premise of prudence is one reason people have embraced the concept--indeed, debit-card use has exceeded credit-card use since 2003.
But choose pen over PIN, and your debit card will almost always work harder for you. If you swipe the card at checkout and select "credit," you avoid transaction fees, gain liability protection and perhaps earn reward points. Didn't know debit cards give you that pen vs. PIN choice? Don't feel bad. In a 2004 MasterCard survey, 70% of respondents said they didn't know either.
The Pen Avoids Fees
Banks don't charge you for making a signature transaction on either a debit card or a credit card. The merchant pays the fee. If you pay by PIN, you run a small risk of being charged extra. A Federal Reserve study last year found that 14% of banks add a fee for PIN-based transactions. Those that do, the study reported, nip you an average of 75¢ per use. On a $40 grocery purchase, that can work out to a surcharge of just under 2%. You could ask your bank about its policy on PINs--or just make the issue moot by signing.
Signing Nets You Rewards
Once the domain of credit cards, rewards programs are now becoming available on debit cards. To earn points, though, you generally have to sign. When PIN-based purchases do qualify, you may not rack up as many points. For instance, with Citibank's ThankYou Network program, you receive one point for every $2 you spend by signature; if you pay by PIN, you have to spend $3 to earn a point.
The Pen Fights Fraud
From the same terminal, transactions are sent over two different networks. Signature transactions go through Visa or MasterCard networks and get the networks' guarantee that you will not be liable if you report fraudulent use promptly. PIN-based purchases are processed through electronic funds transfer systems such as NYCE and STAR. These don't offer additional liability protection, since fraud generally is more difficult to commit--a thief has to know your PIN. Under federal law, if you report the fraud within two business days, you're liable for no more than $50. If you report it within 60 days, you're liable for up to $500. Beyond 60 days you could be on the hook for the entire amount.
So Why Use a PIN at All?
One reason: You want cash back.
Let's say there's an ATM in the store, but it's not from your bank. Stick with the checkout counter. Hit "debit," key in your code, and you'll pocket cash and probably not pay a fee. Run to an alien ATM, and you could be hit with a double dip. In addition to the fee that the ATM tells you it's charging (typically $1.50), your bank may tack on $1.35, on average, for using another institution's ATM. Over time, that could add up to more than pin money.