From a consumer perspective, when you make a purchase with a bank card, the funds come directly from the account that the card is linked to, be that a savings, line of credit or checking account. Regardless of whether you choose debit or credit when you make your purchase the money is withdrawn directly from your account. Choosing credit will not automatically create a slush fund from which you can borrow to pay for your purchases. Credit and debit transactions take the money from the same place, it is just processed differently.
Debit purchases require the user to enter a pin number to continue with the transaction. Entering a pin allows the merchant to debit your account immediately. Debit purchases will typically be declined if the funds are not immediately available for withdrawal at the time of transaction. Debit transactions, much like ATM withdrawals, have daily spending limits which limits the amount of your purchase.
Credit purchases typically do not require a pin to be entered at the time of the transaction; rather you will be issued a receipt that will require a signature just like a typical credit card. The signed receipt is a promise of payment because the credit transaction may not be processed immediately; in fact it may take a few days before your account is debited. The credit option also offers consumers more protections than using a debit option.
A merchant account is a system that allows vendors and stores to process credit and debit cards. This type of service comes with a fee associated with it. Typically the cost of this service is passed on to the consumers in one way or the other. The difference between debit and credit for vendors means something a little bit different than it does for consumers. These differences are usually behind the scenes and not evident to most consumers.
Generally it costs a merchant less to process debit card payments. The fees associated with processing credit transaction tend to be higher because there is more work and risk involved in dealing with credit. Some merchants are able to work with the companies that process credit and debit transactions to negotiate manageable fees for processing these transactions.
The credit and debit options both have fees for all parties. Typically, their credit option is more costly to the merchant while the debit may be more costly to the consumer. Some stores charge customers anywhere from 25 cents to $1.00 on a consumer debit purchase and at the same time the merchant is also paying the processing company for the service.
Consumers may pay nothing for the credit option while the bank may charge the merchant on average $1.50 to process each credit card receipt. Both scenarios result in the banks and processing companies making profits on the plastic.