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Debit Card vs. Credit Card: What’s the Difference?

Debit Card vs. Credit Card: What’s the Difference?

In recent years, more and more Indians have been opting for debit and credit cards to make payments. In fact, in May 2024, more than 518 million ATM withdrawals and 298 point-of-sale transactions were conducted using debit card payments in India.  Credit card payments have also become increasingly popular, with over 90 million active cards in 2023—a number that is only rising. 

Selecting the best card for improved financial control requires knowing its features. To know which card is best for you, it is essential to understand what they do and their differences.  This article explores the differences between debit cards vs credit cards. 

What is the Difference Between a Credit Card and Debit Card?

1. Debit Card

Debit cards are payment cards directly linked to a user’s bank account. They allow customers to withdraw money from their savings or current accounts or use it to make purchases. Debit cards are a practical substitute for writing checks or carrying cash. Some advantages of debit cards include: 

  • Payment of bills: Debit cards can be used to set up automated payments for recurring costs like utilities, rent, or subscriptions to ensure on-time payments and prevent late fees.
  • Cashback at the point of sale: Many stores offer cash back when customers use a debit card, which is a practical way to get cash without going to an ATM separately.
  • Helpful for budgeting: Debit cards are a good option for those who want to budget their expenses better. Because money is taken directly from your account when you spend it, debit cards discourage excessive expenditure.  

Some cons of debit cards include:

  • Limited spending: Your spending limit depends on the funds in your account. 
  • They cannot build your credit score: If you want to build up your credit score, debit cards will not help since they withdraw your funds from your account. 

2. Credit Card

Credit cards let users borrow against a line of credit and pay the amount later. They charge a certain amount of interest unless the borrower pays it back within a specific timeframe. Some advantages of credit cards include:

  • Financing large purchases: Credit cards allow consumers to pay back over time while allowing them to purchase expensive goods right now.
  • Purchase protection: Many credit cards have features that cover stolen, damaged, or lost items within a specific time frame after purchase.
  • Emergency funds: Credit cards provide instant access to funds when needed, serving as a financial safety net in unexpected situations. However, it is essential to use this tool cautiously to avoid accruing debt.

Some disadvantages include:

  • High-interest fees: If you do not repay your credit card on time, you may face heavy interest charges. 
  • Negative effect on credit score: While credit cards may help you build your credit score, late or missed payments can do the opposite. 

What are some Differences Between Debit Card vs Credit Card? 

1. Source of funds

A difference between credit and debit cards is their source of funds. Debit cards take money from the user’s bank account at the time of purchase, while credit cards enable users to borrow money that must be paid back later, up to a predetermined limit.

2. Interest and fees

Debit cards typically don’t charge interest or other fees, except for some account or transaction fees. Credit cards may impose interest charges for late payments and annual fees.

3. Rewards and perks

Debit cards offer few or no benefits, making them less desirable for customers who want to get more out of their purchases. Cashback, loyalty points, and travel advantages are just a few of the alluring incentives that credit cards frequently provide.

4. Fraud protection

Debit cards provide limited protection because any fraudulent activity immediately impacts the account balance until fixed. In contrast, credit cards have reduced liability for unauthorised transactions and better fraud protection.

5. Spending control

Debit cards can help to manage your spending more efficiently by limiting purchases to the account’s available balance. However, credit cards enable borrowing beyond existing finances, which can result in overspending if not used responsibly.

6. Credit score

Using a debit card does not require borrowing and does not affect credit scores. However, using a credit card can impact your credit score. If you pay your bill in full each month and don’t delay payments, it can improve your credit score. 

What are Debit vs. Credit Cards Best for?

AspectDebit cardCredit card
Interest-based Fees Since it uses your funds, there is no interest.Cash loans and outstanding amounts are subject to interest.
FeesMinor or nonexistentThere could be late payment fines, annual fees, and additional expenses.
Credit historyNoYes
Ideal for Budgeting and daily purchases.More significant purchases, accumulating incentives, and establishing credit.

In conclusion

Awareness of credit card and debit card differences enables one to make more informed financial decisions. While credit cards provide flexibility, perks, and the chance to establish credit, debit cards guarantee responsible spending. 

Another major aspect of managing your finances is ensuring your credit score. If you want to monitor and improve your credit score easily, try Tata Capital’s credit score checker.

FAQs

Is an ATM a debit or credit card?

Most institutions provide an ATM card when you open a savings account. This is a type of debit card with which users can withdraw cash.

Can you earn rewards with a debit card?

Yes, some debit cards may offer rewards and benefits. However, this is less prevalent than rewards provided by credit cards.

Do all credit cards charge interest?

Almost all credit cards charge interest. However, this is only charged if users do not pay their bill in full each month.

Can anyone get a credit card?

No, not everyone can get a credit card. To be eligible, individuals must meet age requirements, have proof of stable income, and have a good credit score.
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