Debit vs. Credit: The Wrong Payment Choice Can Cost You Hundreds of Dollars a Year

The debate over debit versus credit rages on.


Whether it makes more sense to use a credit card versus debit card is fast becoming a question every consumer asks at some point. Chances are good that you carry one or both of these cards in your wallet.

Your debit card is similar to a check, and you can use it to make purchases. In addition, you can use a debit card to get cash from ATMs, drawing the money from your bank account.

Your credit card allows you to make purchases by borrowing money from a lender, usually a bank. You can defer payment until the lender sends you a bill; generally, you do not have to pay the balance in full each month.

Each of these types of cards might come with fees, although the exact costs can differ significantly between debit and credit cards. Following is a breakdown of some of the fees you might pay when using each.

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Related: 31 Worst Fees in America

Costs Associated With Using Debit Cards 

In some situations, it might be a good choice to use a debit card rather than a credit card. But be aware of the restrictions involved with debit cards and know that if you use one, you might be subject to several types of fees.

1. PIN-Based Transaction Fee

Debit card transactions fall into two different categories:

  • A PIN-based transaction is also called a direct transaction. It requires you to input your personal identification number, a security code that allows you to complete the transaction. The money is promptly withdrawn from your account.
  • A signature-based transaction is also called a deferred transaction. This type of transaction occurs when you select the credit option rather than the debit option for your card, and it requires your signature to complete the transaction. The money is debited from your account within a few days.

Many retailers now accept only PIN-based transactions, as signature-based transactions are more expensive for them to process. The reduced number of signature-based purchases has cost banks money, and banks are trying to recoup the lost revenue by charging consumers a fee for PIN-based transactions.

The fees that banks charge for a PIN-based transaction can range from 25 cents to $1.50 per transaction, according to an ABC News report. The New York Public Interest Research Group conducted a survey of 31 New York banks and found that 47 percent of them charged a PIN-based fee at the point of sale without warning the consumer, ABC reported.

2. ATM Fee

It is a well-known fact that if you use your debit card to obtain cash at an ATM not owned by your bank, you might be charged a fee. Such fees can amount to several dollars. Bank of America and Wells Fargo, for example, each charge $2.50 per non-network ATM transaction.

3. Overdraft Fee

An overdraft fee associated with a debit card is similar to the fee you would be charged if you wrote a bad check. It is relatively easy to overdraw an account if you make big purchases or if your account balance is low. For example, if you make multiple purchases in one day, and those purchases are not withdrawn from your bank account until the end of business day, you could overdraw the account.

Depending on the terms of your account agreement, the bank might still approve the purchase, but it will charge you an overdraft fee. Overdraft fees vary from bank to bank. If you don’t know how much you have in your bank account, it’s best not to use your debit card so you can avoid incurring overdraft fees.

An analysis earlier this year from SNL Financial and CNN Money found that the average overdraft fee at the nation’s biggest banks is $34.

4. Lost Funds Fee

If you lose a debit card and someone fraudulently uses it, you might be out a lot more money than if the thief had stolen and used your credit card.

If a credit card is lost or stolen, federal law limits your liability to $50 or less of the fraudulent purchases. However, if your debit card is lost or stolen, you must notify the bank within two business days of noticing the theft to obtain the same $50 maximum liability protection. If you fail to notify the bank within that time frame, you might be on the hook for up to $500 — or more.

Mark Huffman, a consumer news reporter with ConsumerAffairs, advised that consumers not let their debit card out of their sight. For example, if a waiter has to take your card, it’s best not to pay with a debit card. Also, beware of using a debit card at a gas pump. Crooks sometimes install skimmers at pump card readers that can steal your number.

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Related: 9 Most Dangerous Places to Use Your Debit Card

Costs Associated With Using Credit Cards

Credit cards can be a great way to defer paying for a purchase. In other cases, they can help you pay for unexpected emergencies by allowing you to gradually make credit card payments rather than having to pay off the expense all at once.

That convenience comes at a price, though. If you do not pay off the balance in full every month, you will incur credit card fees. Other fees might apply as well when using credit cards.

1. Interest Charge

If you do not pay off the balance every month, you will end up with credit card debt that incurs interest charges. The interest rate associated with credit card debt typically is higher than the interest charge for any other type of bank loan. noted that cardholders paid an average interest rate of 15 percent on unpaid balances in 2015.

2. Late Fee 

If you fail to make the minimum required payment by the due date, your lender might charge you a late fee. Federal law caps these fees at $25, but only if the lapse is occasional. Fees can go to $35 if you are late more than once within six months.

3. Over the Credit Limit Fee

If you go over your credit limit, you might be assessed a $25 fee. But this only applies if you have given your credit card company the permission to allow charges that go over your credit limit. If you have more than one violation in a six-month period, the credit card company can charge you a fee of $35.

4. Annual Fee

Some credit card companies also charge you a fee just to keep your account active. These fees might be charged annually or prorated monthly. However, it is relatively easy to find credit cards — including rewards cards — that charge no annual fee.

5. Foreign Transaction Fee

If you are planning to take a trip overseas, check with your credit card company to find out if it charges a foreign transaction fee. The company also might charge this fee for online purchases made from foreign vendors.

6. Cash Advance Fee

If you are in a cash crunch and need a cash advance from your credit card, be prepared to pay a fee. These fees are the reason you should only use a credit card for cash advances in extreme emergencies.

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7. Balance Transfer Fee

If you plan on transferring the balance of one credit card to another credit card, you will likely pay a balance transfer fee. Such fees usually amount to 3 to 5 percent of the amount transferred, with a $5 to $10 minimum, according to Clearpoint, a credit counseling agency.

Do your research on the balance transfer fee before making the transfer, as it will have an effect on how much money you’ll save by transferring the balance. The best bet is to find a credit card with no balance transfer fee.

Related: 10 Things That Happen When You Don’t Use a Credit Card

Credit Card vs. Debit Card: The Bottom Line

Debit versus credit — the debate continues. Each option has its pros and cons and associated fees. Understanding these details can help you make the right choice the next time you dip into your wallet to pay for a purchase.

About the Author

Kerri Fivecoat-Campbell is a writer and author living her dream life in her little house with her husband, Dale and currently five rescue dogs. She’s been blogging at Living Large in our Little House since 2009 when she discovered the Tiny/Small House Movement. Her book of the same name will be released by Reader’s Digest March 2016.