Q: Why do store clerks sometimes ask, "Credit or Debit?" when I pay with plastic? How should I respond?
A: This is probably one of the most confusing things in the world of consumer plastic, so grab some coffee. This is going to be long.
First, understand that nowadays credit cards and debit cards look alike. They have the same MasterCard or Visa logos. A retail clerk doesn't know what you are using. So even if you swipe a credit card (which absolutely cannot be used as a debit card), she may still ask "Debit or Credit." (Respond "Credit" or she may ask you to input your PIN which would be all wrong with a credit card.)
The reason they ask this question is so they will know how you wish your debit-card transaction to be processed.
There are two methods by which debit cards are processed to extract money from your bank account to cover a debit-card transaction.
Not all retailers are set up to process both ways, however. So, not every retailer asks you that horribly confusing question, "debit or credit?"
There are two ways that debit-card transactions are processed: Direct debit-card transaction: This requires you to input your PIN to complete the transaction. This PIN-based debit-card transaction removes the purchase price from your checking account almost immediately.
When asked "Debit or Credit?" you should respond "Debit" if you elect for this to be a PIN-based debit-card transaction.
Deferred debit-card transaction: This requires you to sign your name on the sales slip to complete the purchase. This signature-based debit-card transaction is called "deferred" because it can take up to two or three days for the purchase price to be removed from your checking account.
When asked "Debit or Credit?" you should respond "Credit" if you want a signature-based debit-card transaction.
Think of a PIN reader (that little machine where you type in your PIN) as a direct connection to your bank account. Once you punch in your number and hit "Enter" the money's zapped out of your account—even if you don't have enough to cover the purchase price.
Don't assume that if the purchase was approved, you have sufficient funds to cover it. In the unlikely event you don't have enough money in the bank, you will overdraft or bounce your account and the transaction will be completed. The bank will cover your little indiscretion and then slap you hard with punitive fees for having gone over.