Credit vs. Debit

A list member of the jPOS Developers Group asked a series of questions wanting to know the difference between a Debit transaction and a Credit transaction.  It's actually a deceptively complex question which can be given a multi-part answer.

Essentially, the Debit/Credit terminology has (in my mind) three distinct meanings in a payment systems setting...

First, there's Debit Card vs. Credit Card.  Alpha list member Mark Salter provided a great answer to that:

A credit card transaction reduces the available credit on an account, which a company backs, think of this as a purchase on credit (that someone lends you).  You settle this account at a later date, probably in reaction to receiving a statement.

A debit card transaction results in money being debited from an account in your name at the *time* of the transaction.  There is no loan made and the money must be available in the source account.  You are spending your money in real-time.

Great stuff. 

To delve further and clear up any remaining uncertainties, I noted that it would be worthwhile to read the Wikipedia entry for Credit Cards:

http://en.wikipedia.org/wiki/Credit_card

...and then the Wikipedia entry for Debit Cards:

http://en.wikipedia.org/wiki/Debit_card

Those are really great write-ups.

The Wikipedia entry for Debit speaks to the second definition of debit vs. credit in this setting: namely whether one of these 'dual use' check cards is deployed at the point-of-sale in "debit" or "credit" mode:

In some countries (e.g., the U.S.), terminals allow the user of a Visa or MasterCard debit card to choose whether the purchase is a "credit" or "debit" purchase. In a "credit" purchase, the user signs a charge slip (as in a traditional credit card purchase); in a "debit" purchase, the user enters a PIN. In either case, the user's bank account is debited.

So in the first definition, the card products themselves are identfied as credit vs. debit.  In the second definition, the card is flexible while it is the transaction itself which is either a credit or debit variety.

To further muddy the waters, there's the third situation in which the term "credit" may be used in conversations of this nature: certain POS applications allow for a Merchandise Refund.  In this regard, the Refund is often categorized as a "credit" (vs. the original sale being a "debit").  In this situation, the credit and debit terms are related purely to their accounting nature, i.e., when you're looking to place the transactions into one of two categories for accounting and reporting requirements.

Comments

[CUA]

There is a big difference when you compare credit and debit. Transactions using either of the two has advantages and disadvantages so when I deal with my personal transactions I make sure that there are no lose ends and that everything goes smoothly.

[Credit Card Application]

the second definition, the card is flexible while it is the transaction itself which is either a credit or debit variety.