Debit or Credit? Hidden Fees Hold the Answer


"Will that be credit or debit?"

The seemingly innocuous question gets answered without thought at countless checkout lines. But consumers should think carefully the next time they use their debit cards at the checkout, because the wrong choice can cost $1.50 each time they swipe their cards. This may sound like peanuts, but it adds up. (And given the woes of the market and the economy, are you going to sneeze at peanuts?)

"If you have a debit card with a Visa or Mastercard logo, which button do you have to press in order to use it?" asks Richard Crone, vice president of financial services for Dove Consulting, a Boston-based strategy firm. "It's sort of a trick question. But you should probably still push credit."

Indeed, the fee you pay depends on how that debit-card purchase is processed. Sign the receipt as you would a credit-card purchase and you won't be charged a cent. Plus, you'll be able to take part of any incentives your card may offer, like cash back bonuses or frequent-flyer miles. But if you enter a PIN number, some banks will hit you with a service fee and you won't rack up any incentive bonuses.

"When they ask you credit or debit, they're really asking you how you want your card to be used," says Susan Craine, consumer associate for the New York Public Interest Research Group. "Some people might not know this. Personally, I was never given instructions on how to use my card when I first received it."

The Debit Boom

While debit cardholders may have some confusion about how to best use their cards, it hasn't slowed down their usage, which Crone says is growing at 35% compounded annually.

Three years ago, cash was king, used in 39% of all purchases, while credit and debit cards accounted for 22% and 21%, respectively, according to Dove Consulting. By last year, debit-card usage had surged, eating away at both cash and credit's share as a type of payment. In 2001, Dove statistics show debit accounted for 26% of all purchases, while cash's share shrunk to 33%.

"Debit cards are the fastest-growing consumer product in the history of Visa," says Stacey Pinkerd, senior vice president at Visa. "Over 115 million people carry a Visa-branded debit card, with 60 million to 70 million using it every month."

As debit card usage has boomed, so have the number of banks that penalize customers for entering a PIN instead of signing the receipt. In a study of 106 banks in the New York City area, NYPIRG found that 57% charge fees for punching a PIN in the checkout line. The average fee was 89 cents, but more than half had fees exceeding $1. Five of the 10 banks that issue the most debit cards charge some kind of fee for punching a PIN, ranging from 25 cents to $1.50, according to Consumer Reports.

Why the Confusion?

There are two ways to process a debit-card payment. When a debit transaction is treated like a credit card, it is carried over the Visa or Mastercard network. But under a PIN purchase, a transaction is routed along a regional banking network, such as MAC.

"It all comes down to competition," says Pinkerd. "There are different networks that operate in different ways. Ultimately it all comes down to consumer choice."

But retailers have been pushing customers towards PIN-based transactions because it's cheaper for them to process purchases that way. On a PIN transaction, retailers pay a flat fee between 15 cents and 25 cents, but a signature-based transaction costs them 1.9% of the total purchase. Purchase a $200 stereo with a debit card, sign the receipt, and retailers end up paying $3.80 instead of pocket change.

According to a study from Jefferies and Co., retailers pay four times more, on average, for signature-based transaction than they do for PIN-based transactions. Those high fees have led retailers to sue credit-card companies. Until the legal fracas is resolved, consumers can expect credit-card companies to push for credit purchases, while retailers push them to use their PIN.

To Sign or Not to Sign?

For the most part, consumers should sign for purchases to avoid paying fees, but it's also important to remember that not all cards charge fees for PIN-based transactions -- 43% of the banks polled in the NYPIRG study didn't.

"What we tell people is that this is a case where they need to know the specifics for their particular debit account," Craine says, adding that some fees are waived for maintaining certain balances. "You need to research what fees you'll be charged. It's up to consumers to inform themselves."

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