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By Savannah Ziegelbauer
MoneyMix Contributor

It happens all the time: You're at the checkout, you hand the cashier your debit card, and she asks if you want to choose credit or debit. But wait—didn't you just hand the cashier your debit card?

No matter if you choose credit or debit when using your debit card, either selection will result in funds being withdrawn from your checking account, both include fraud protection, and you can track both by using your financial institution's online banking site or by reconciling your monthly statement.

What the cashier actually is asking is: "How do you want to prove your identity?" and "How fast do you want your payment to be deducted from your checking account?"

proving you are you

Debit cards have two ways of confirming it's actually you at the 7-Eleven checkout buying ramen noodles and Diet Coke, and not someone else. After you swipe your card, the screen will prompt you to choose either credit or debit—which means confirming your identity with a signature-based verification or a four-digit PIN-based verification.

It's not a good idea to use debit online—there's a small risk of scammers hacking into your account and clearing all your funds. 

Choosing the credit option sends your payment through the card network—typically Visa or MasterCard—to your credit union, where your debit card is directly linked to your checking account. This is similar to paying with a credit card, except the money comes directly out of your checking account rather than becoming a loan—aka actual credit card charge. When choosing credit you will sign for the transaction as proof that it is you.

If you opt for debit, or are asked to enter your PIN (personal identification number), the payment goes through the PIN networks—Star, Pulse, or Interlink. You type in your four-digit PIN number, and no signature is needed. The money still comes directly from your account.

Your credit union or bank will allow you to use both types of verification modes, but it's not uncommon for some financial institutions to charge a small fee for using PIN-based transactions.

If you're shopping online and use your debit card to pay for something, it may be processed as a credit signature transaction. When shopping online, take extra care to be sure you're at known merchant sites, have your card registered with Verified by Visa or MasterCard Secure, and look for a Secure lock symbol as authentication of the merchant, or enter your PIN. And, although the risk is small, there's potential for scammers hacking into the merchant site and getting to your account and clearing all your funds. This seldom happens, but watch your account and report any transactions you did not make.

time is money

In addition to the verification difference, the timeframe for deducting funds for your purchase from your account is different for PIN-based and signature-based transactions, according to Rick Jennings, vice president of payment systems for Allegacy Federal Credit Union in Winston-Salem, S.C.

 Find out more about your Visa or MasterCard debit card.

 Know what to do if your card is lost or stolen.

When you choose credit for your debit card purchase, it may take a couple of days for the merchant to process your purchase amount, so funds are not immediately removed from your account, Jennings says. When this happens, there typically is a hold placed on the funds; you still will be able to see the transaction on your online banking account.

However, when you opt for debit and enter your PIN, funds are withdrawn immediately from your checking account, just as if you had taken cash out of an ATM. When you're at the checkout and the cashier asks you if you want any cash back, the only way you can do so is by entering your PIN.

Jennings says the important thing to remember is that in both cases—signature and PIN—transactions are secure. The Electronic Funds Transfer Act covers both signature-based and PIN-based debit transactions.

Under the Act, if your debit card is lost or stolen, your card issuer can hold you liable only for the first $50 as long as you report it within two days. If you report it within 60 days, you're responsible for up to $500. Any longer than 60 days, you could face unlimited liability.

Keep in mind that you might have a daily limit on debit card transactions, so if you make a large purchase, it might not go through if you sign with your PIN. Check with your financial institution for details. Also, if your debit card transaction is less than $25, many merchants will not require a signature to help speed up the checkout.

Published December 27, 2010

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