The Real Difference Between Debit and Credit Transactions

Credit card and debit card transactions still run the world for small business owners. In fact, there are over 687 million Visa debit cards and 267 million Mastercard debit cards in circulation in the US. 

Contrary to popular perception, however, there are a few major differences between debit and credit cards. The main one is that debit cards can only be used to withdraw money that users already have in their checking accounts.

Let’s take a look at everything you need to know about debit and credit cards for your small business. We’ll discuss how they work, the differences between them, and when to use which one. 

What is a credit card?

Did you know that there are over 1.1 billion credit cards in the US alone? Credit cards don’t allow you to withdraw money directly from your bank account. Instead, credit cards operate based on credit. In other words, credit card users may not have the money physically in their checking accounts.

Credit card companies assess each customer’s credit history and credit score to determine the line of credit they’ll extend. Your customers’ credit limits will depend on their payment history and any derogatory marks they may have received over the years.

What is a debit card?

The main reason for the extensive adoption of debit cards may surprise you. It’s all about bookkeeping.

Most US adults use debit cards because they make it easier to “keep track of expenses.” They’re a way for customers to use their existing funds without writing out a check or money order. Customers can also request cash back when using a debit card, but they can’t do that when using credit alone.

Since debit cards work with the money that’s already in your customers’ checking accounts, they can help prevent overspending. But customers will still be charged overdraft fees when they spend more than they have in their checking/savings account.

Debit cards vs ATM cards

There are a lot of similarities between debit and ATM cards. Both debit and ATM cards come from traditional financial institutions. Customers will also be asked for their four-digit PIN (personal identification number) on debit and ATM card transactions.

The big difference? Debit cards can be used to make purchases from a customer’s asset account –– i.e. their checking or savings account. ATM cards, on the other hand, can only be used to withdraw cash from ATMs. ATM cards require customers to withdraw cash from their bank or ATM to make purchases. They’re not a standalone payment option, like debit cards.

Key differences between debit and credit cards

Credit cards offer a few advantages that debit cards don’t. Namely, credit cards give customers the chance to build up their credit score when they make timely payments. With credit cards, customers can maintain or increase their spending limit by making monthly payments. But they’ll still have to pay a monthly interest charge on their credit card balance.

With debit cards, on the other hand, what you see is what you get. Another key difference between debit and credit cards is that you can’t spend past your limit with debit cards. 

A whopping 87% of Americans own a debit card. This makes it easier for customers to monitor their spending, and harder to go into debt. As mentioned earlier, customers can make cash withdrawals when using debit cards.

Corporate expense accounts are often linked to debit cards. For obvious reasons, many employers opt not to give their corporate staff unlimited spending limits.

Pros and cons of debit cards

Let’s talk about debit cards in some more detail. Customers need to monitor their checking and savings accounts closely for double-entry charges –– being charged twice for the same item. They’ll get charged a fee if they go beyond their available funds, but they won’t have to pay interest.  

Debit cards are often higher liability accounts than credit cards. With that said, some debit card providers offer rewards cards similar to those offered by credit cards companies. These cards give customers access to perks like hotel stays, cashback, extended warranty, equity accounts, etc. Every payable transaction can lead to increased benefits, so customers are incentivized to spend.

While traditional debit cards work with the money that customers have sitting in their accounts, prepaid debit cards are another story. Prepaid debit cards don’t have to be linked to a checking account. They’re a great option for customers who struggle with their credit. The credit limit is prepaid for when the card is purchased, not processed at a later date.

Pros and cons of credit cards

Credit cards may not be safer for customers trying to stick to a certain spending limit. However, they’re great for those trying to build up their credit or those concerned with the potential security risks of debit card transactions.

If a customer is able to make regular payments by a certain due date every billing cycle, credit cards are a great option. They come with the same perks as debit cards. They also come with a hefty interest rate paid to the lender.

Customers are subject to additional fees if they can’t meet the monthly minimum payment. That’s how credit card companies and financial institutions make their money. This is also referred to as “accounts receivable,” or the profit generated by issuing credit cards.

Credit cards are often safer than debit cards. If a customer gets their credit card stolen, they can freeze their account before they lose any actual money. The onus falls on the credit card provider to track down the thief and recoup lost money. 

When a debit card is stolen, that money is often lost until the financial institution resolves the issue. And there’s often a lag time of about a week while the customer waits for an untainted card.

Can you use a credit card as a debit card and vice-versa?

Rarely. Credit cards do not work with the same accounts as debit cards. However, both debits and credits can be tracked with a single or double-entry system.

Customers can track their credit card expenses by adding a journal entry when they receive their monthly statement. Another option is to add an entry to the entry system with each transaction. However, most credit and debit cards come with a banking app so customers can track expenses from their phones.

Many of the companies that customers encounter when they travel ­­–– hotels, rental companies, etc. –– require a credit card. But, as a retailer, you’ll want to offer as many payment options as possible to maximize sales.

Is one better than the other?

Credit cards offer increased fraud protection. However, certain debit card providers, such as Amex, offer a higher level of fraud protection than other options. 

The potential of overdraft fees can be a deterrent for customers considering debit cards. However, debit card users can invest in overdraft protection to prevent the overdraft fees that can come with debit.

Want to know the biggest difference between debit and credit transactions? Debit cards translate right into cash, as do ATM cards; whereas customers can’t withdraw cash from a credit card.

The bottom line

Here’s a simple way to understand debits and credits. Debit cards are “buy now, pay now” while credit cards are “buy now, pay later.” Credit cards are great in a pinch and for customers who are in the process of building up their credit. Debit cards are perfect for those who prefer to work with the money they already have.

As a retailer, you have very little control over whether your customers use credit or debit cards for transactions. What you can control, however, is how much your business pays for credit card processing. By partnering with Payment Depot, you can save an average of $400 a month on credit card processing. 

Payment Depot offers wholesale membership-based pricing so you actually save more as you process more transactions. No matter how your customers choose to pay, your business will continue to save money. Contact us today to learn more about how we can help you.