Debit or credit?

"Debit or credit?" Ah yes, the conundrum posed by many a sales associate at the culmination of your shopping trip. I almost never think twice about my answer every time I swipe my (debit) card -- and this is even for purchases of as little as a few dollars (I never carry cash, it's a bad habit).

"Debit," I answer. Of course. It is a debit card, after all, so why would I use it as credit?

According to CreditUnions.com, 26.6 billion transactions were made with debit cards in 2006 alone, so all signs point to plastic being more popular than paper nowadays. (Not sure if that's such a good thing, being mired now in this credit crisis, but that's beside the point.)

When a cashier asks you "credit or debit" (in what tends to be a somewhat monotonous tone -- they could really care less) do you consciously ask yourself which is the best alternative -- the PIN or the pen? Surprisingly there is a difference, and depending on what kind of spender you, your answer can drastically alter the rewards you reap in the end. There may actually be more perks to using your check card as a credit card over one of the debit variety.

Usually people spout off an answer based on pure personal preference alone, tied to however they are feeling in the heat of the moment. Even I've been guilty of this, which I guess isn't all that surprising -- I do get caught up in emotional impulse more often than rational logic, the latter of which I have Love for.

Within the debate, fees are a defining characteristic according to which side of the debit v. credit coin you land on. Type in your PIN and you make the merchant happy because the cost of processing your debit transaction is less than if you had chosen "credit." (The fee tacked on to the merchant's cost is usually just a few cents, but if you're a retailer like Target, a few cents here and there definitely adds up.) Choose the pen over debit and sign for your purchase, though, and then Visa and MasterCard will be elated -- they can then process your transaction through their networks, and not through the retailer.

Of course for you as the spender, the merchant versus card company fees issues don't play into your decision; the money will come directly out of your bank account either way. But according to a 2004 MasterCard survey, 70% of debit card holders didn't know that swiping their check cards as credit was even an option -- one that may actually be the better choice.

Here's why:

• Signing saves you fraud headaches. When you pay with a check card, your transaction has two ways it can go (depending on whether you choose debit or credit): If you enter your PIN, then your transaction gets processed through an EFTS (or "electronic funds transfer system") such as STAR or NYCE. Unfortunately EFTSs don't offer liability protection. On the other hand, signature transactions get processed through Visa or MasterCard, for example, who guarantee you won't be liable for any fraudulent use (that is, if you report it in a timely manner). As I mentioned a couple months ago, I had $600 withdrawn from of my bank account from ATMs being simultaneously used in Cuba, Chicago and Mexico. Luckily my bank (Bank of America) refunded all the money that had been stolen (after I had to go through much paper work), but what they found was that my PIN had been stolen and duplicates of my card had been made. I've had never written my PIN down or told anyone what it was, so I was shocked and suprised, but thieves have a myriad of ways they can find out your code these days. If typing in your PIN is more your style, be careful.
  

Also, don't forget that in case your bank doesn't cover your stolen amount, you should still report the fraud ASAP. Federal law says that if you report the fraud within two (business) days, you're liable for no more than $50. Wait up to 60 days and you're liable for up to $500. Beyond 60 and you can most likely say bye-bye to getting any back. Sometimes procrastination just sucks.

• Paying by PIN could lead to small fees for you. A Federal Reserve study released a couple years ago stated that 14% of banks add a fee for PIN-based transactions. Those that do, the study reported, charge you about 75¢ per use. Of course this doesn't pertain to the big wigs like Bank of America and Wells Fargo, but if you're with a smaller bank, don't forget to ask about their policy on PIN use.
  
• Extra "rewards" can come with signing. Many cards have promotional deals affixed that can earn you "points" or "rewards" toward snazzy deals like cruises, airfare deals and...magazine subscriptions. To reap all these rewards though -- who wouldn't want a free year of Horse and Hound? -- you usually have to sign for your purchase.
  

So why use a PIN at all? Now that I'm rethinking the PIN vs. pen debate in my own life, one giant use comes in handy when answering "debit" -- it gives you cash back! For a girl who never carries cash (again, I really need to break that habit), I often find myself in a position where I verily need paper money, but there is nary a Bank of America in sight. Of course, this is precisely when all other banks seems conveniently parked on every street corner. "Where is a Bank of America when you need one?!" I grumble -- until I spot a 7/11 emerge from the flock of Wells Fargos and Wachovias. Sweet. Not only do I get to buy a slurpee, but I can also get a $20 back in the deal.

Use just any bank's ATM and run the risk of being hit with severe fees (these are a huge pet peeve of mine). Usually the ATM will charge you at least $1.50, but I've even seen fees as high as $3. And that doesn't even count whatever fees your own bank will slap you with (generally another $1.50 to $2). As someone on a budget, I can't think of a worse personal hell than being stuck having to withdraw a $20 from a nondescript ATM, and mentally tacking on the $5 total in fees that come nefariously attached to my cash. It's a violating feeling, to say the least, and a PIN acts as a definite savior in the situation.