The Small Business Guide To Debit VS Credit

For customers, paying with debit or credit feels the same. For businesses, though, the costs, timing, and rules behind each type of transaction can be very different.

Let’s break down how credit and debit payments work, what they cost, and the key differences that matter for your business. Once you understand the basics, you can start looking for the best credit card processors for your business.

The Basic Difference Between Credit And Debit Transactions

Credit transactions are run through credit card networks (Visa, Mastercard, Amex, Discover), and what merchants pay depends on their payment processor.

Debit transactions run on debit/ATM networks, and merchants are charged a debit-specific rate.

The main difference for merchants is cost. Debit usually has lower fees — especially on larger purchases — while credit often costs more.

How Credit Transactions Work

When a customer pays with a credit card:

1. Payment info travels from the merchant to the processor to the acquiring bank.
2. The acquiring bank requests approval from the issuing bank.
3. The issuer checks the customer’s credit limit and authorizes.
4. The acquiring bank pays the merchant.
5. The two banks pay each other to settle the charges.
6. The consumer repays the issuing bank according to the terms of the card agreement.

Because banks are essentially extending a short-term loan, credit transactions carry more risk for issuers — and usually higher fees for merchants.

How Debit Transactions Work

Debit cards pull money directly from the customer’s bank account. The issuing bank confirms the funds are available, places a temporary hold, and authorizes payment. Risk of default is minimal since the funds already exist.

But debit can be processed in two different ways — and that choice impacts fees, speed, and security.

Credit Path Debit VS True Debit

The credit path debit (or debit as credit) option goes through the credit card network even though it’s a debit card. No PIN is required for these transactions.

With these transactions, the issuing bank places a hold on the funds, authorizes the payment, and transfers money through the credit network. The merchant receives funds in the same 2–3 day timeframe as a regular credit card transaction.

Credit path debit fees are usually similar to credit card rates, though some processors offer slightly lower rates.

True debit (or PIN debit) uses a separate debit/ATM network, not the credit card network. This option requires a PIN, adding a layer of security.

The issuing bank immediately places a hold and transfers funds directly to the merchant’s bank. Settlement is much faster — sometimes within hours or by the end of the business day. Fees tend to be lower on larger transactions because the network costs less to use.

So to break it down in the simplest of terms:

• Credit path debit is slower and often costs more, but can be easier for customers who choose “credit” at the terminal.
• True debit is faster, more secure (PIN required), and cheaper on larger transactions, but requires a POS terminal with a PIN pad.

Merchant Fees For Credit & Debit

The fees you pay depend on which path is used and the size of the bank backing the card.

More Key Differences Between Credit & Debit Transactions

The difference between credit and debit transactions extends beyond per-transaction rates. Let’s explore some of the other differences.

Why Credit VS Debit Matters For Small Businesses

For merchants, the real differences between debit and credit transactions come down to fees, timing, and dispute rules. Debit is often cheaper and faster, but credit gives customers more protection.

Accepting both lets customers pay their way while keeping your costs predictable and avoiding surprises.

To learn more about payment processing costs, read our comprehensive guide to credit card processing fees.