Credit or Debit? How the Wrong Choice Hurts Small Businesses (and You)

credit card readerHello all! My name is Mike. I’m a big time fan of Len Penzo, and it’s a privilege to share some of my thoughts on his blog. I read Len’s article on why choosing debit or credit is like picking salad dressing; in that post he mentioned that he always chooses credit over debit when using his bank card unless he needs some cash back.

Today, I’d like to share one additional thought for you to consider before making the choice between credit and debit, based on a small business owner’s perspective: choosing credit ultimately costs small businesses and YOU more money.

Here is an overview chart summarizing the costs and benefits of each option.

Payment Type: Consumer Benefit: Business Cost: Consumer Cost:
Credit Fraud protection & occasional rewards Per transaction & percent Documented propensity to spend more
Debit Limited fraud protection Per transaction Nothing


Using Credit Costs Small Businesses Money

One major thought to consider when choosing between credit and debit is the effect it has on your local small businesses. The difference in cost between debit and credit transactions for a small business is around 3%. The business typically pays approximately 30 cents for each debit transaction whereas they pay approximately 30 cents plus 3% of the order per credit transaction.

What difference does 3% make? Let’s say after paying all its costs, advertising, payroll, taxes, and more taxes, a small business has a margin at the end of the day of 10 percent (that’s pretty good nowadays, especially for a smaller business); that means your 3% credit card fees are costing them 30% of their profit!

As an example, if every customer paid with credit, a small family business would see its profit reduced from $50,000 to $35,000 — and if their margins before card fees were closer to 5%, then you are looking at cutting their profit from $50,000 to $20,000!

Why should you care? Three reasons:

  • What’s good for your community is good for you.
  • Supporting small businesses promotes competition, which increases value, and decreases prices.
  • Many small businesses provide better service (If price were everything, no one would buy Apple computers!)

Using Credit Cards Costs YOU Money Too

By choosing credit over debit, small business owners aren’t the only ones who have to pay more; you do too! Here’s why:

First, credit cards make you spend more money. Dave Ramsey has noted in the past that people using credit cards typically spend 10% more money than they would have otherwise, dwarfing the “1% cash back” that you may be getting back in rewards.

Second, the added fees that local small businesses have to pay for credit transactions often gets passed on to the consumer through higher prices and that means less money for your local economy.

Now, I understand the need for fraud protection when shopping online or even out of town. However, is fraud protection really necessary for shopping at your local grocery store, restaurant or the like? They need our business and support just as much as we rely on them to deal honestly with us. It’s nice to be part of a community who you know you can trust.

For all these reasons, I choose to stand by my local stores rather than taking my business down the road to the megastores, and I will continue to think twice when that option to choose credit or debit pops up. I will ask myself if I really need fraud protection at this store. Likewise, I will also consider whether choosing credit, instead of debit, will just hurt us all in the long run.

As Len mentioned, we all have different scenarios running through our heads as we approach the decision between the two — online shopping, the idea of credit card rewards, convenience, etc. My hope is that you are now more aware as to how this choice ultimately affects your local businesses, and therefore you!

About the Author

Mike Glanz is the founder and operator of, the largest marketplace for booking movers online. For the record, they only accept credit cards.

Photo Credit: USDAgov

(This is an updated version of an article that was originally posted on January 19, 2011)


  1. 1


    Where I live, there is only one small store that I know of, and it is a cute little hardware store. Usually my purchase is so minor that I use cash anyway. You reminded me though, I need to shop there more often. Although maybe some of the restaurants I go to would benefit from me using cash instead of credit cards.

    I have no issue using my credit card at the bigger stores at all though.

  2. 2

    David Chen says

    I don’t think there is much point to discriminate between small local stores and bigger stores. Yes, those bigger stores seem remote to you. But their employees are small folks like you and me, their stocks are owned by small folks directly or indirectly through mutual fund and pension fund.
    And if small business want to encourage people to use debit card, they should have returned some of saving to debit card users through discount that is only available to debit card user.

  3. 3


    Small businesses accept credit cards since you are more likely to buy more using plastic. Nope, I just can’t bring myself to feel guilty for using my cash back rewards cards whenever I make any purchase over $5. I also feel more pain when using a card than when I use cash, so it’s just all around better for me to stick with credit. I know I’m one of the weird ones, but do what works for you, right?

    • 4

      Dennis says

      You SHOULD feel guilty. The bank is giving you NOTHING. That 5% comes from the merchant, not the bank. Your not weird, just selfish.

      • 5

        Karen Kinnane says

        Dear Dennis, Any merchant has the option to refuse payment by credit or debit card, and insist on cash only. Most merchants feel it is better to pay the 5% in order to get the business. It is not the responsibility of the buyer to feel “guilty” for using the most beneficial to themselves method of payment. The 5% is a cost of doing business and if you can’t afford to pay it, don’t take credit cards. It’s not the responsibility of a buyer to insure that the person from whom he buys makes a profit. It’s up to the buyer to negotiate the best terms, price and payment option for himself and for the seller to also optimize his selling terms for his own benefit.

  4. 6


    Thanks for giving us the “credit or debit” point of view from a small-business owner’s perspective, Mike! Great job! I think you make some good points, especially regarding the costs to small businesses. However, I have two counterpoints to your article: 1) Although I understand the data that shows people who use credit cards ultimately spend more than those who use cash, I do not subscribe to the idea that credit cards *make* anybody send more money — we are ultimately responsible for our own decisions; 2) I don’t think we can put blind faith in waiving fraud protection just because we are shopping locally. Let me give you one anecdote: My father-in-law was ripped off from a local merchant a couple years ago — lucky for him he used a credit card, or he may have never recovered his $400. :-)

    Thanks again, Mike!

    • 7


      Thanks Len. Good points. I’d have to say in response to 1.) I agree – we need to take responsibility for our own spending habits, regardless of if it’s credit/debit/cash. I’d have to argue though, if it does help us subconsciously to spend less money by using debit/cash, why not make the switch?
      2.) I’d agree again. Blind faith wouldn’t be prudent. But faith built up over the years in a favorite neighborhood company helps me determine which places I feel safe to use my debit card at – like the local grocery story in my neighborhood I’ve been shopping at for 6 years.

      • 8

        Karen Kinnane says

        Dear Mike, You’ve been dealing with the local grocery store safely for six years. They occasionally hire new help and what if one of the new hires took the job to skim card numbers during his / her busy work day? Your relationship with the store is pure good luck as the staff of the store occasionally leave and are replaced by unknown new people. You’ve been lucky! .

  5. 9

    Diane says

    Sorry, I only use my debit card at the ATM. Period. I will never use it for transactions since having a minor brush with fraud two years ago (a mere scanning error and not malicious, but impossible to correct). I use cash when I can at local stores, but nothing will persuade me to use a debit card for anything public. Never. Ever.

    And I don’t spend more with credit. I have a budget, and I manage to that.

  6. 10


    Hi Mike, that’s a point of view I’ve never thought of before. I never use debit because I don’t want to give up fraud protection. While I don’t think I’ll start using a debit card, I can see a good argument for spending cash, especially with businesses you trust. It doesn’t “make” you spend more, it saves the business money, and it doesn’t support the mega-banks (with credit card fees) which I hate anyway.

  7. 11

    Modern Hamlet says

    I pay with my bank debit card on 90% of my transactions and have always tried to differentiate between big chains and mom & pop stores. While my bank incentivizes selecting credit over debit (via their rewards program), I only choose credit when shopping at big chain stores. Mom & Pops always get debit.

  8. 12

    Spedie says

    I have often thought of trying to go plastic free – I don’t have a credit card, but am thinking of dropping my debit card, and going CASH and CHECK all the way – just like I used to.

    I am 47 years old, and my goodness, how the heck did I buy plane tickets, rent cars, etc for over half my adult life without a credit or debit card? I managed to do it, and do it quite well.

    Cash costs businesses nothing compared to debit and credit.

    Planning with cash is not that hard, I managed to do it, and was much better off before I fell into the “plastic trap”.

    Think about it…no credit cards, no debit card(s)….it would be harder to steal my identity. Businesses would make more in their profit margins, etc.

    I recently had my credit union write me a letter and send me a new debit card because “a third party had notified them that my debit card number had been compromised”. I am one of those people who shop the same stores and gas stations with consistency. It still happened!

  9. 13


    It sounds like you are advocating cash! That would be the lowest (none) cost alternative. If all businesses only accepted cash, there would be an under reporting of income. Realistically, there is no perfect method of payment. I prefer credit cards for a variety of reasons, one of which is record keeping.

  10. 14


    I use Debit only anyway. As far as I know in the UK the exact same fraud protections are applied to debit cards as they are credit (my debit is run by VISA).

    • 15


      Hi Forest –

      I thought, regarding identity theft, the rules applied the same to debit and credit cards in the US: if someone steals your identity and makes fraudulent purchases as you, you are not responsible. I think it might just be harder to deal with banks on that point as they are very good at making you forget you’re the victim. I didn’t make that statement in the article because I had no definite proof of those protections covering both credit and debit cards.

  11. 16

    JoJo says

    When I frequented a co-op, I always asked the cashier which was cheaper, running my debit card by the PIN or by signature (essentially debit or credit). She said if it was under $20, it was cheaper to run it as credit, otherwise it was cheaper as debit.

    So in small businesses, I always ask the cashier if I don’t have enough cash on hand.

  12. 17

    Joe says

    “Supporting small businesses promotes competition, which increases
    value, and decreases prices.”

    Huh? Buying the best product at the best price from ANY business, large or small, promotes competition. You’re “voting” for the business who supplies the best deal. Supporting small businesses “just because” promotes small businesses, not competition.

    • 18


      What drives your buying decision defines what type of competition you’re promoting. If you’re buying strictly based on price, you’re encouraging us to Wal-Mart ourselves to death – resulting in lower and lower quality of product and service. Seth Godin says in a post on his blog “Cheaper is the last refuge of the person who’s not a very good marketer.”

      Most small businesses, in my experience, have reigned superior in offering higher quality products and customer service along side their products. And many times, their pricing is within pennies of the big chains. Small businesses rise to threaten sluggish older larger companies, hence competition.

  13. 19


    I always use credit card for everything even a gallon of milk at the corner store. I do have a debit card but I use it only to get cash from the bank’s own ATM a couple of times a month.

  14. 20

    TMS says

    The day a store offers me a discount for debit/cash is the day I will consider not using my cash back credit card for every single purchase.

    • 21



      Have you checked out PerkStreet? They’re an online bank that offers cash back on their debit cards. Might be an incentive to switch to using Debit.

      • 22


        Mike.. what the interchange rate on that debit card? it might end up costing the merchant more money. Someone has to pay for that cash back and its usually the business owner.

  15. 23

    No Debit Here says

    A former employer with several convenience stores and some cash flow issues (he lost a supplier because he couldn’t meet the tight payment terms, and went to a pricier supplier with longer terms) runs everything (including debit cards) as credit – signature and no PIN.

    The register software doesn’t display a debit option and there is no keypad for entering a PIN.

    If transactions are more expensive for my former employer, why is he doing this? (His prices are way high and I’m confident he don’t lose money on any transaction, but 2 or 3 percent is nothing to sneeze at, especially at the high volume he does.)

    I assume he has some barrier preventing him from running debit, but I can’t imagine what it is. (Is there some sort of hefty initial cost barrier involved?)

  16. 24

    James Studle says

    One correction to your perspective on debit vs credit. You, and all other business owners who accept PIN debit, do pay a fee in addition to the transaction fee for debit. The fee is a network pass through charged by the debit network that is processing the payment. In the old days the processors used to charge a flat fee of $.50 to $.75 cents per transaction because there were caps on PIN debit fees charged by most networks. That’s no longer true. Look on the back of your debit card and you will see 2 or three logos at the bottom. PLUS clears through the ATM network. NYCE, STAR, MAESTRO, INTERLINK, AFFN, ETC. are point of sale debit clearing networks. Each has a fee. For instance STAR charges .80% + $.23 per transaction with no cap and AFFN charges .75% + $.20 with a cap of $.85 per transaction. Most other networks have similar rates (and no Caps) which amount to about half the cost of credit card interchange but are a little higher on the per transaction fees. The net effect generally is that, for most merchants, credit is cheaper for small tickets and PIN debit is cheaper for large sales. I apologize if this is confusing but there really is no simple answer.

    • 25


      James (and JoJo’s comment below)
      Sorry to generalize like that. You’re right, small purchases like those under $20 can turn out to be more expensive for businesses when a consumer uses a debit card and PIN. From our perspective at, most (if not all) purchases are large enough to cost us a big chunk of change in credit card processing fees.

    • 26


      I completely agree with James. I work with convenience stores whose average ticket it 8.00. and I am always telling them to use credit on anything under 12.00 (give or take this depends on the rates and the card being used. for for generalities.. well say 12.00)

      there is no such thing as a FLAT debit fee. Like James pointed out, the BANK interchange fees for debit vary and are .05 and .22 cents to 1.61% and .o4 cents. or a just .85% on the amount being charged. Then you have the credit card company that has to charge something.. whether its .05 cents .. or .20 cents.

      so for a pack a cigarettes at 5.12 and they run this as a debit.. it wil cost the merchant approx . 35 as debit.. and as credit small ticket it will be 1,66 + .06 so that 5.12 will cost the merchant .25cents. So, running it as credit for a 5.12 purchase is .10 LESS per transaction with specific amount.

      if you have 1000 transactions that are small .. running them as a credit will have the merchant 100 just by swiping and having them sign for the transaction.

      Please be care when you tell the merchant debit is always cheaper. Its not true. For larger ticket items, it is.. depending on the card that is used.

      So for the merchant, with transaction amounts under $12-$15… credit is cheaper for them.

  17. 27

    Community First says

    @ No Debit Here there “SHOULD” be no charge, at least not with OUR payment processor. I dont remember our old payment processor (years back) but I just signed a deal with a new one within a week or less (easy simple process of paperwork and very nice guy). They work with MANY companies under one to supply everything you could imagine (utility/phone bill payments, visa/gift card reloads, international cards, prepaid phone minutes, and other things on top of visa/credit/ebt retail processing). Our card reader has a built-in debit pin pad (built into the pad that the store clerk uses. they would just have to turn the pad to them and have them enter). Also it has a slot in the back for a pin pad (most do. you can check the model of your card reader and google/ask the company). an external pin pad for mine runs $25 or less. A reader like mine was under $200 (again it was free. i have an old nurit that supports it too but won’t support bill pay or some service, so they gave me a new one.)

    My rates for debit/credit card are 0.55% debit purchases and 1.58% credit. Don’t believe there’s no other fixed rate/charge. When it comes to bill pay/reloadable we make money (up to 14% on att prepaid mins, 35% on visa reloadable gift cards, 27% long distance, and lets not talk fixed rates of bill pay lol) . This is for a non-profit though so it all goes to a good use. These are community services.

  18. 28

    Jestep says

    I’ve been in the processing industry for about 12 years now, and am an owner of a small privately owned credit card processor, and wanted to address some of the information and comments.

    First off, for anyone that isn’t familiar with the industry, the card associations (Visa, Mastercard, Discover) have fixed costs called interchange. These fees are not negotiable by us as a provider, no matter our size, so no matter who anyone processes through, beit a bank, or a private company, the cost-floor is going to be about the same. My point in saying this is that there is nobody with a unique or lower cost, so notwithstanding an error in setting up an account, anytime someone claims to have some special or grossly lower or different pricing, it’s because money is being made somewhere else.

    As far as debit goes, since the durbin regulation, the new debit rates have really hurt small ticket merchants. What these did is increase and fix the transaction fee and allowed debit networks (star, pulse, etc.) to charge a separate fee for the first time. Instead of something like 5% and $.05, they now have to pay a percentage and a fixed transaction fee of $.20. You can do the math, but on <$10 transactions, that's a huge jump in cost. Higher ticket merchants may have seen savings but we've seen a number of customer's processing fees literally double. With that being said, it's also unlikely that credit is going to be significantly cheaper, because credit transactions have higher interchange fees to begin with.

    For PIN vs. signature debit, at this point there is no discernible difference between using your debit card with a PIN or using it just like a credit card as far as costs go. The fees the merchant pays are now the same for either type. The only difference is that as a consumer you lose almost 100% of all protection from fraud if you enter your PIN number. You still do get a fair amount of protection if you use your debit card with a signature like a credit card. In either case, a merchant has substantial leverage for these transaction types because both prove that you were at their place of business and gave them your card, which statistically equates to an extremely low chance you are being ripped off.

    As far as fixed PIN debit fees, those were normal about 5 years ago. If someone is getting fixed fees, their processor is bundling the actual percentage and transaction fee into a single and obfuscated rate.

    Just a savings tip for all business owners, make sure you get a merchant account with interchange plus, or cost plus, pricing. The 3 tier, fixed, and other pricing methods are often much easier to read on a statement, but are almost always going to be more expensive. With interchange plus, your processor adds a percentage and transaction fee to the interchange cost on each transaction. There are more than 300 interchange categories, so for large merchants, a statement can get ugly, but you will only be charged your negotiated rate over what interchange rate the transaction falls under. With the other pricing methods, they have to bundle the hundreds of interchange categories into tiers or into a flat rate, and they are always going to do it in a way that benefits them and that is invisible to you.

  19. 29

    Rick says

    Look if the register rings up a price and there is no incentive to use cash or debit I am going to choose credit and get at least 2% cash back and fraud protection. If the merchant had a “Cash Discount / Debit Discount” then maybe I would consider using those methods. Honestly the credit card doesn’t make you spend more that is a choice. If there is no incentive to use something other than credit why should I? The only place i see the discount of using cash currently is at gas stations where they have two prices listed one for cash one for credit.

  20. 30


    When I work at my part-time retail job, we are encouraged to encourage the shopper to pay with the debit option rather than the credit option as much as possible. It doesn’t always work, but sometimes is better than none of the time. This is a good way to get the word out.

  21. 31

    djmj3284 says

    If you use your debit card and merely select credit you are not gaining fraud protection. You need to use an actual credit card to get fraud protection. See the link.

    I’m a small business owner as well and there are many different ways that businesses are charged for credit and debit transactions but almost all of the methods result in higher charges to the merchant when using credit. My machine for instance charges me more for credit on any transaction over $12.50.

  22. 32

    Iron Mike Sharpe says

    I understand fully that credit costs businesses more money, and in turn, costs consumers more.

    However, if I stop using credit cards, the price I am charged is not going to drop 3%. I will still pay the inflated price AND I will lose out on the rewards I get from using my credit card. I will buy gas using cash when there is a cash discount.

    And I definitely do not spend more by using a credit card. I have a careful budget and I stick to it.

  23. 33

    Colby says

    I would have to disagree.

    First, it’s not a fact that you will spend more with the credit card. People that are not good at managing a budget or have impulse issues may spend more, but ultimately it’s a choice we all make. So if you are good with planning your money, and you don’t use a credit card or rewards as an excuse to spend money, then this point is null.

    Second, many small businesses that offer the same products/services as the large stores have higher prices. If your top priority is saving money, you should shop where the price is the lowest, and pay with the most efficient payment method. For most, that’s a credit card with cash back. Any other ethical reasons you have to shop local are personal opinions and really are not a valid reason to insist everyone follow suit.

    Third, service varies from business to business, no matter whether it’s local or a big box store. Today I walked into a locally owned auto body shop to get an estimate for a repair. The manager was outside chatting with a buddy. We walked by on the way to the entrance, and said hello. We waited at the front counter for about 10 minutes before the manager finally came back in to serve us. I don’t exactly call that great service, since he saw us coming in. Awhile back at a big box hardware store, I got excellent advice and help from one of the employees. He helped me pick out the right parts I needed. I was really satisfied. Service quality isn’t about local vs corporations. It’s about the individual employee attitude, and shopping local doesn’t guarantee anything.

  24. 34

    Juan Franco says

    Really strong points in helping the local stores in saving money, but I do agree with Len, we are responsible for our own spending. Just because you have a credit card does not mean everybody spends extra money! If I had a choice in protecting my assets in saving someone else money I’m thinking of me in the long run. We might have trust in the local store workers but they are constantly hiring new help which brings the trust issue back into play. I’m sticking with credit instead of debit.

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