Credit card issuers make their money in two primary ways. First, they charge interest on balances held over 30 days by the card holder or “borrower.”
Their second primary income stream comes from fees charged to merchants on a per-transaction and per-purchase basis. These fees are usually a few percentage points or so. They are readily recognizable to most card holders because they are the pool from which special offers like “cash back on purchases” are funded.
Debit cards are different. Technically, a “debit” is a cash withdrawal from the debit card holder’s bank account. A credit purchase is technically a loan. They both achieve the same purpose, but the costs associated with each are often very different.
Purchases made with a debit card can be subject to transaction fees, but those fees are capped by law. Purchases made with a credit card are also subject to fees which are broken down into a combination of “discount” and “transaction” fees.
The reason these fee structures are different has much to do with the difference in how purchases are funded. When a debit card holder makes a purchase, they are spending their own money directly from their bank account. The credit network identified by the logo on the debit card itself is simply a conduit.
When a credit card holder makes a purchase, technically they are buying a product with loaned money. The merchant is charged a fee for the privilege of offering credit cards as a method of payment, and for the transaction itself.
For the debit purchase, if any fee is charged at all, it is usually charged to the purchaser. For the credit purchase, the fee is charged to the merchant and generally passed on to the customer in the form of a higher price for the product. However, there are regulations governing how much a financial institution or a merchant is allowed to charge for a debit card transaction as well.
Understanding the difference between the two methods of payment is crucial to understanding how each will affect your purchases and how they might affect the total actual price of the product itself. Anyone trying to manage their finances should make the effort to understand transaction fees. They add up.