Dear Lifehacker, When I'm shopping, I'm often presented with the option to use debit or credit when I pay. I've heard there are benefits to using credit, but aren't there fees involved that can drive up the price or put a strain on the owner of the shop I'm in? When should I use which? Is there even a difference? Any insights appreciated. Thanks, Card Swiper
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Dear Card Swiper,
There are indeed differences, though given that the vast majority of non-cash payments are handled electronically (you'll only see a paper credit card form if the network goes down), the differences aren't as pronounced as they used to be.
In Australia, there are essentially three distinct ways that you could pay for a transaction electronically using a card:
- via EFTPOS, which draws money immediately from an associated bank account. This means you can't spend money you don't have (unless that account happens to have an overdraft facility).
- via a credit card (Visa or MasterCard). This allows you to spend funds you don't have and can have other benefits (such as frequent flyer points), but you'll pay interest (either immediately or after a set period).
- via a debit card (sometimes known as a debit credit card), which effectively uses the branding of a credit card (and its associated network), but draws on your own money in an associated bank account. If you don't want to possess a credit card, a debit card gives you a means of shopping in retailers that only accept them (online stores being the most obvious examples).
In most contexts, EFTPOS and debit cards amount to the same thing; you're using your own money. While historically using a debit card might have allowed you to use a signature rather than remembering a PIN, most modern cards also offer a PIN option. Visa is planning to make the use of a PIN compulsory for all transactions on its cards in Australia by March 2014, and MasterCard is expected to follow suit.
One key point: a retailer can choose to accept whatever payment mechanisms it likes. It is under no obligation to support any particular mechanism (credit card, EFTPOS or even cash). All of these methods have costs associated with them — EFTPOS and credit cards charge fees, while cash effectively creates a labour cost through the need to bank it on a regular basis.
Retailers are also able to impose a minimum transaction amount for any electronic transaction (the practice is banned by some individual bank merchant agreements but isn't illegal as such). They can also charge an extra fee for using a credit card, though this must be clearly disclosed and can't be excessive or unreasonable — it should reflect the cost of offering the credit card service, not be a source of extra income.
If a retailer imposes specific conditions, making the choice can be easy. If there's a fee for credit cards but not EFTPOS, then EFTPOS is the logical choice. If you have a bank account which limits the number of free withdrawals you can make each month, then using the debit card option may make more sense. A case in point: Between 2010 and 2012, Woolworths blocked the option to use debit cards, forcing customers in that situation to use EFTPOS, a move that wasn't wildly popular with some consumers. That policy was reversed late last year.
As we've mentioned, one area where debit cards can provide an advantage is online shopping. If a particular store only accepts credit and debit cards, then a debit card gives you a no-interest means of accessing that service.
Under most circumstances, sensible budget planning dictates not using a credit card. If you pay off your balance in full every month, a credit card won't cost you anything extra, and you may enjoy additional benefits such as frequent-flyer points or extended warranty deals. However, you need to be realistic about these: the value of frequent flyer points can quickly be wiped out by interest bills, and Australian consumer law already gives you well-established warranty rights.
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