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Difference Between Debit Card and Credit Card

Have you ever wondered why some people prefer debit cards while others swear by their credit cards? Debit cards and credit cards are fundamental financial tools used by millions of people around the world, but they function quite differently.

Aug 1, 2024, 13:50 IST

Difference between Debit and Credit Card

A debit card is linked directly to a checking account, allowing users to spend only what they have available. In contrast, a credit card provides access to a line of credit from the issuing bank, enabling users to borrow money up to a predefined limit for purchases or cash withdrawals.

These differences affect not only how transactions are processed but also impact aspects such as fees, interest rates, and credit scores. Understanding the distinctions between debit and credit cards is crucial for effective financial planning and responsible usage.

What are Debit and Credit Cards?

Debit cards, also commonly referred to as check cards or bank cards, can be used by users for a variety of activities, such as in-store purchases and ATM withdrawals. With a debit card, consumers can take money right out of their bank account to make business transactions. Since money is taken out of the transaction instantly, it works similarly to cash or cheques.

With a credit card, consumers can borrow funds to make purchases or withdraw cash up to a fixed limit. The cardholder repays the card issuer later, often with interest if the outstanding balance is not paid in full by the due date. The card issuer makes the merchant payment on the cardholder's behalf.

Debit and Credit Card Difference

Both debit and credit cards serve essential functions in modern financial transactions, with debit cards promoting responsible spending by limiting users to their available funds. In contrast, credit cards offer flexibility and rewards but require careful management to avoid debt.

Here are a few ways that debit and credit cards differ from one another-

BASIS FOR COMPARISON	CREDIT CARD	DEBIT CARD
Meaning	A Credit Card is a plastic card that allows the customer to purchase goods and services on credit, up to the specified limit. Here, the card issuer makes payment on the customer's behalf.	A Debit Card is a plastic card, through which the customer can spend money by drawing funds that are deposited in his/her bank account.
Issued by	Banks and a few non-banks, and it can also be issued by various approved enterprises.	Issued by banks are linked to the bank account.
Eligibility criteria	Specific eligibility criteria, which must be fulfilled	No eligibility criteria
Payment terms	Deferred	Immediate debit to the customer's account
Implies	Pay later	Pay now
Credit Period	Generally 45 days, and it is normally structured as revolving credit.	No credit, instant debit
Account with the issuing bank	Not necessary	Necessary, which is linked with the card
Access to deposit account	No access	Direct Access to the concerned account, be it a current or savings account
Credit score	It helps in creating good credit and improves credit score	No impact on the credit score
Rewards	It offers rewards, based on spending like cashback, vouchers, reward points, etc. which are redeemable.	No or Minimum rewards or incentives for spending.
Maximum Withdrawal Limit	Determined based on credit score, existing debt, and credit history of the customer.	Less than the balance lying on the credit of your savings or current account, to which the card is linked.
Source of money	Credit extended by the card issuer	Concerned bank account
Spending	Spend more than what you have	Spend only what you have
Who pays for the purchase?	The credit card company pays the vendor first on behalf of the cardholder for the purchase and then the cardholder pays the credit card company.	The account holder pays for the purchase.
Bill	You get a monthly credit statement or bill that reflects all the transactions that took place during the period.	You do not get any bill or statement at the end of the month.
Interest	Interest is charged on the outstanding balance when payment is not made to the bank within a specified period.	No interest is charged.
Penalty for default	High	Not applicable

Advantages and Disadvantages of Credit Cards

Here are the key advantages and disadvantages

Advantages-

Improving credit score: Helps in creating a favorable credit history.
Rewards: Provides travel points, cash back, and more benefits.
Fraud Protection: Improved fraud protection and dispute settlement are examples of consumer protections.
Convenience: Accepted widely for a range of transactions.

Special Offers: First-time 0% APR and other discounts.

Disadvantages:

High interest rates: If debts are not paid in full, they might result in a large amount of debt.
Fees: There may be an accumulation of annual, late, and other fees.
Overspending Risk: It's simpler to spend more than you have, which can result in debt.
Variable Rates: Over time, interest rates may rise. Minimum payments have the potential to lock borrowers in a debt cycle.

Advantages and Disadvantages

Here are some advantages and disadvantages of debit cards-

Advantages of Debit Cards

Very convenient to use for ATM withdrawals, contactless payments, online payments, and in-person purchases
Allows spending within your account balance, preventing overspending
Provides an alternative to carrying cash
Offers instant transfer of funds for online payments
Readily accepted at merchants within the country and internationally
Provides a secure payment option with a PIN, chip/magnetic strip, and transaction alerts
This can be easily obtained when opening a new bank account

Disadvantages of Debit Cards

Spending is limited to your account balance, unlike credit cards which allow you to spend more than you have
Transactions are immediately deducted from your account, reducing your available balance
Lost or stolen cards can lead to unauthorized transactions and account access if not reported promptly
Some merchants may not accept debit cards for certain types of transactions like hotel deposits or car rentals
Fees may apply for certain transactions like international ATM withdrawals or overdraft fees

Similarities Between Debit and Credit Card

Both these cards can withdraw cash from the ATM if instant money is required. Debit card ATM withdrawal is free for limited transactions over the counter but in the case of credit cards charges are applicable whenever money is withdrawn through an atm card.

This poses a risk for fraud to be committed both with the plastic card itself. But when it comes to credit cards, there is a higher risk of fraud.
You do have to pay an annual charge for using your debit card and credit cards. Although the Debit card charges are nominal, the Annual Charges on Credit Cards depend.
Ensures regular services such as cash withdrawals, funds transfer, and online or offline shopping payments & bills payments;
These payment devices can be used all over the country or, sometimes even internationally to buy a variety of products.
Each of them needs a 4-digit PIN for transaction verification.

Your financial habits and goals will determine whether a debit card or credit is best for you. Knowing how these cards are different and alike can help you choose wisely, thereby helping you stay on top of your money.

No matter which one or combination of debit and credit cards you choose, when managed correctly they can ultimately dictate your financial success while providing convenience to make payments anywhere.

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