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A debit and credit card usually look identical, with 16 numbers encrypted on them, expiration dates, EMV chips, and magnetic chips. Both cards enable you to make purchases online or in stores. They have one main difference: debit cards enable one to borrow money by drawing the funds deposited at the bank, while credit cards allow one to borrow funds from a card issuer up to a certain amount to buy items or withdraw cash.
When purchasing with a card, it has become a habit to indicate whether the payment will be made by debit or credit. But are they different? And what are smart ways to use a credit card or debit card? The convenience these cards offer is immeasurable, but they have essential differences that should be known by any credit or debit card user.
A debit card is an electronic payment method that allows the deduction of a purchase amount directly from the cardholder’s bank account (current or savings).
Physically, the debit card has the exact dimensions of a credit card, but in terms of use, it is similar to a check, as it represents a cash payment order issued on funds from the customer’s account.
Among the advantages of a debit card over a credit card, the following stand out:
A debit card is a safer and more convenient alternative to a check. To carry out a transaction, the customer must use a password to authorize access to their bank funds. The transaction is carried out through an electronic terminal called POS (Point of Sale), which is installed in the commercial establishment, and this is directly connected to the banking network. A receipt is issued at the end of the transaction, and all transactions are listed on the customer’s monthly account statement.
You may also read this: Disadvantages of multiple credit cards
Here are the key features of a debit card: –
A debit card gives you immediate access to money, which allows you to make daily purchases and make bill payments.
A debit card allows you to withdraw cash from ATMs at any time. This means you get access to money whenever the need arises.
Many debit cards now come with contactless payment options. This allows you to make quick payments without entering your PIN.
It allows you to use your own money, so there is no interest on any transactions.
You can use the debit card to make purchases through point-of-sale, e.g. store, fuel station and website. The amount will be deducted directly from your bank account.
Many debit cards are accepted worldwide. Hence, you can use it even in foreign nations.
Debit cards come with various benefits. They are as under: –
It helps you manage your budget. With a debit card, you can spend only up to the amount you have in your bank account. Hence, there is no overspending. Moreover, you can check your spending by going through your transaction history on the mobile app or the bank’s website.
You can’t buy things on credit. Whatever you buy immediately gets deducted from your bank account. Hence, there is no accumulation of debt.
As soon as you swipe the debit card anywhere, your account balance gets reflected in real time. Hence, you can monitor your spending very closely.
You can use a debit card to withdraw cash from ATMs. This gives you immediate access to cash whenever you need. There is no need to visit any bank for cash withdrawal.
A debit card has an auto-debit facility for recurring bill payments. Moreover, it has many offers for online shopping. Online payment with debit cards is very easy as you just have to provide an OTP to validate transactions.
Most of the banks now offer rewards on debit card usage. You can earn points which you can redeem later on to get benefits. Some merchants give you special rewards if you shop with a specific debit card. You get points or discounts on their products or services.
A debit card has a default PIN without which you cannot withdraw money or make any transaction. You can change the PIN whenever you want. For any transaction done with a debit card, you get an SMS notification. Moreover, you can make online payments with OTP.
Debit cards are very convenient and easy to use, but still they have certain drawbacks: –
It is not so easy to get a refund for fraudulent transactions. It can take time as the money is directly deducted from your bank account.
Debit card usage can’t help you in building your credit score. Even if you use the card regularly, it won’t have any impact on your credit score.
You can’t spend more than the balance you have in your bank account. This would have a great disadvantage in emergencies when you need huge funds.
You have to pay annual fees. Moreover, there are also charges for international transactions on ATMs and if you withdraw above the free limit.
A debit card is used in the following ways: –
You can withdraw cash from an ATM using a debit card.
Make payments at stores and restaurants by swiping or tapping your card.
Make payments for shopping, bill payments, subscriptions and other online purchases.
Pay utility bills, mobile bills and other recurring expenses.
You can directly use the money lying in your bank account without carrying cash.
You can easily make quick payments at supported terminals just by tapping the card.
Certain debit cards can be used to make payments and withdraw cash in a foreign nation.
A credit card is an electronic payment method. It is a plastic card with a chip and the holder’s name, the card number and date of expiry on the front and back, a place for a customer’s signature, security number, and a black magnetic stripe. This card was made to make purchases easier and lower the amount of cash in circulation.
There are many smart ways to use credit cards. You can use it to buy goods or hire a service. The cardholder gets the payment invoice every month at the address indicated and can select to pay the total amount charged, the minimum amount, or immediate amount, and the remaining amount to be paid the following month by charging an interest rate. Each credit card account has a purchase limit that the issuing bank usually determines. You can make purchases to lower the available limit until it’s insufficient.
It is important to control these expenses well because the interest charged on revolving credit and even on debt instalments are usually quite high. The idea is to always keep spending up to the limit so that you can pay the entire bill when it comes due.
Here are the major features of a credit card: –
A credit card comes with an approved credit limit. This is the maximum amount you can borrow on the card. This limit is decided by the credit card issuer and depends on your credit score and credit history.
Many credit cards offer rewards such as cashback, reward points, travel points, etc. Some even offer the benefit of access to airport lounges and free memberships and subscriptions of specific brands.
Interest is charged on the outstanding amount if not paid by the due date. The interest charges are very high.
If you pay the credit card bill on time, then it can improve your credit score. However, if you fail to make timely payment, then it can also bring your credit score down.
There are various benefits of a credit card, which are as follows: –
A credit card gives you extra time to make the payment on your spending. Every month, a credit card generates a bill of purchases you made in the last 30 days. You get around 15-20 days to repay these dues.
A credit card helps in building your credit history and even improves your score if you use it responsibly. This can be very helpful in getting loans in future.
You can make large purchases with a credit card without making a payment. Later on, you can get this converted into EMI. This makes the repayment easier.
It provides immediate access to funds in an emergency. When you face a sudden emergency and don’t have funds, you can use a credit card and make a payment.
Credit cards give you an interest-free period of 45-60 days in which you don’t have to pay any extra for the remaining balance. If you repay the entire outstanding amount by the due date, then you can use the credit without paying any interest.
Below are listed some of the disadvantages of a credit card: –
If you don’t pay the outstanding amount by the due date, then you will be charged high interest charges. This can create huge debt for you.
A credit card allows you to spend more money than you have, which can tempt you into overspending. This will result in debt and high-interest rates on future payments.
If you make late payments or don’t pay the credit card dues for a long time, then it can have a negative impact on your credit score.
A credit card can be used in the following ways: –
A credit card allows you to make large purchases without paying any amount upfront. You can also get this converted into EMIs and repay the amount over time.
A credit card helps you build a credit score. If you pay the bills on time and keep your credit utilisation ratio under the limit, then it will improve your credit score.
Many credit cards offer benefits such as cashback, reward points, travel points, discounts and other perks on eligible transactions. These rewards can help you get additional value from your regular spending.
A credit card provides you with instant funds in an emergency when you don’t have enough funds. But you should be very careful and repay the outstanding amount on time to avoid high interest costs.
Deciding whether debit or credit is better depends greatly on your finances at the time of purchase. In debit, as the amount is immediately deducted from your account, you don’t risk forgetting you made the purchase or spending the money on something else.
On credit, you can earn a few more days to pay. One of the many things to gather about your credit card is when the invoice will be closed. Anything you buy between that date and the invoice due date will only be billed on the following month’s invoice, which means more than one month of billing deferral. Another advantage of credit is the ability to split purchases of more expensive products according to the seller’s availability. If you get a loan from your credit card and pay on time so this will also help you to build a good credit history which is called credit score or CIBIL score. Here is a detailed article written on difference between credit and cibil score. With the help of this article, you will know everything about credit and cibil score.
The major difference between credit and card is how the payment is made. In the debit function, the money is debited from the payer’s account at the time of purchase, while in the credit function, the payment is processed on the spot, but the charge is only made later through the invoice. Here are some credit cards vs. debit cards comparison that you should understand.
| Parameters | Credit Card | Debit Card |
|---|---|---|
| Funds Availability | A card holder uses lender’s fund within a credit limit. | It deducts amount from customer’s saving/current account. |
| Cash Limits | A credit card has a fix limit for funds depending on card limit and credit history. | Card holder can use only available amount in their saving/current account. |
| Interest Rates | Include interest rate charges in case of late payment. | No interest charges are applicable on debit card. |
| Purchases | Lender pays for your purchases. | Purchases through your own account balance. |
| Invoices | It generates invoice of every payment for pay latter. | It creates statements of transactions but do not generate bill. |
| Annual Charges & Fee | Joining fee, annual fee, late payment fee, interest charges, etc. | ATM cash withdrawal fee & annual fee only. |
| Benefits | Short term loan option – in case of emergency | It stops you to spend unwanted spends. |
| Rewards & Cashback | Various types of rewards points and cashback options available. | Minor rewards and cashback option on shopping. |
| Repayment | Monthly Repayments | No Repayments |
| EMI Facility | Mostly offered on transactions above Rs.2,500 (may vary across issuer) | Offered on limited transaction as per vendor-bank agreement |
| Build Credit History | A credit card has an Impacts your credit score directly. | A debit card has no direct impact on credit score |
The functions of credit and debit are very different, but the misuse of either one can have serious consequences for your financial life.
A person who regularly monitors the balance and has a guaranteed emergency reserve can use the debit function more frequently. They are less likely to need the money at the last minute or to enter an overdraft if their institution has this service.
Customers who participate in card points programs or loyalty programs such as cashback will have more advantages if they pay for their purchases with credit.
The value of purchases can also be useful to know the smart way of using credit cards or debit cards. For smaller purchases, such as the supermarket, pharmacy, etc. It is recommended to use a debit card so as not to lose control over your financial life.
For larger purchases such as travel expenses, appliances, and car expenses, it may be interesting to use the credit function to split the amount and give your budget a breather.
Check out lendingplate’s Travel Loan
Credit cards are also very useful for paying for subscription services, as many platforms still do not accept the debit function as a payment method.
Both credit cards and debit cards offer convenience, security and flexibility, but they are quite different from each other. A debit card allows you to use money directly from your bank account, which is quite helpful for daily expenses and cash withdrawals and that too without creating any debt.
On the other hand, a credit card allows you to borrow money up to a pre-determined limit and offers benefits like an interest-free period, EMI options and credit-building opportunities. However, if you use it carelessly, then it can lead to high interest costs and debt. One should select a debit card or credit card as per your spending habits, financial needs, and repay the dues on time.
It depends on your financial discipline and goals. If you want to use your own money and don’t want any debt, then a debit card would be a better option. Whereas if you want to build your credit score and earn rewards and cashback, then a credit card is more useful.
You can use both credit and debit cards for online shopping. With a credit card, you will be able to earn reward points and cashback. Whereas in the case of a debit card, the amount directly gets deducted from your bank account, which can help you in budgeting.
Both debit cards and credit cards come with security features such as fraud detection, encryption, OTP, etc. But a credit card gives an added layer of protection, as borrowed money is utilised, so there is zero liability for fraudulent purchases.
No, a debit card can’t help you build your credit score, as you use your own money. Whereas a credit card, if used responsibly with timely payments, can help build your credit score.
If you don’t pay your credit card bill on time, then you will have to pay late payment fees and interest on outstanding dues. It will also have a negative impact on your credit score.
On a debit card, you spend only as much as you have in your linked bank account. But some bank accounts do offer an overdraft facility where you can spend more than your balance. A credit card, on the other hand, has a certain credit limit, which makes overspending easier.
A credit card is quite useful in international travel as it offers travel rewards, discounts and other benefits. However, better options depend on foreign transaction fees, exchange rates, acceptance and other applicable charges on the card.
Yes, some debit cards do offer rewards and cashback like credit cards. But still, credit cards offer more benefits and rewards depending on the card.
Yes, you can withdraw cash from an ATM using a credit card. This is called a cash advance facility. However, it involves cash withdrawal fees, and interest is calculated from the date of withdrawal. Hence, it should be used only as a last option.
Debit cards have annual fees, ATM charges if used beyond the limit and foreign transaction charges. Credit cards have annual fees, interest, late payment charges, cash advance fees and foreign transaction charges depending on the card and issuer.
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Unifinz Capital India Limited is a Non Banking Finance Company (NBFC) registered with the Reserve Bank of India (RBI). lendingplate is the brand name under which the company conducts its lending operations and specialises in meeting customer’s instant financial needs.
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