With initiatives like Digital India, the use of credit and debit cards has significantly risen since June 2024. In fact, a total of 1.451 billion credit, debit, and prepaid cards were recorded in the first half of the year.
Credit and debit cards are used across the world, and while they may look similar, there are key differences between them and how they work. This article will delve into what they are, how they work, and the key differences between credit and debit cards.
What are Credit and Debit Cards?
Credit and debit cards are small plastic bank cards. They have a unique 16-digit card number, magnetic strips, and EMV chips. They also have expiration dates and distinct CVVs (Card Verification Value). Both cards are helpful in making online and offline transactions.
Plastic currency can be used by swiping, tapping, or manually entering card details. They are also often used to withdraw cash from ATMs (with some limits and charges), and can be linked to apps, wallets, and websites for online transactions and contactless payment, making cards extremely convenient modes of payment. Despite these similarities, there are many key differences between a credit vs. debit card.
What is a Debit Card?
Debit cards allow users to make purchases or withdraw cash using funds from their accounts. They are payment cards linked directly to your account, and the amount is deducted from your bank balance. Debit cards can be used for various kinds of transactions and to withdraw cash from ATMs securely, primarily when issued by major payment processors. There are six major types of debit cards in India. These include Mastercard, RuPay, Visa, Visa Electron, and Contactless and Virtual debit cards.
What are the Benefits of Debit Cards?
Debit cards come with several advantages, such as:
1. Protection against fraud
Earlier, credit cards offered more protection than other payment methods. However, in recent years, payment processors have offered more safety measures for debit cards.
2. Help avoid debt
Debit cards directly withdraw money from your existing account balance. This means users are more likely to stick to their budgets, avoid impulsive purchases, and not rack up debt.
3. No annual fees required
Credit cards often charge an annual fee, a fee to withdraw cash from ATMs, and other charges. However, debit cards do not charge yearly or cash withdrawal fees (if withdrawn from your financial institution’s ATMs).
What is a Credit Card?
Credit cards allow users to borrow funds to purchase goods and services or withdraw money. They work on the “buy now, pay later” principle. When you use a credit card, the issuing institution extends you a line of credit. This can be used to make purchases or draw cash. The amount has to be paid back on a specified date, and additional interest charges may be applied if this due date is missed.
What are the Benefits of Credit Cards?
Credit cards come with several benefits for users. These include:
1. Build a credit history
Your credit score is highly significant today. It determines whether financial institutions will approve your loan applications and reflects your creditworthiness. Your credit card usage is also reflected on your credit report.
Timely repayments and low credit utilisation ratios can help increase your credit score. However, it is essential to note that payment delays negatively impact your credit score. Thus, using your credit card responsibly is crucial.
2. Protect against fraud
Providers offer stronger protections for consumers in cases of fraud or unauthorised transactions. Reporting any suspicious activity on your credit card as soon as possible is vital to receiving protection benefits.
3. Rewards
Many credit cards offer rewards to users, including cashback offers, travel points, discounts for purchases, and more.
What are the Differences Between Debit Cards and Credit Cards?
Criteria
Credit Card
Debit Card
Mode of operation
Credit cards operate on borrowed credit and allow spending up to a pre-approved limit.
Debit cards operate on funds directly withdrawn from the linked bank account.
Interest charges
Credit cards may charge interest fees in case of delayed payments.
When you use debit cards, you are not borrowing money. Therefore, users don’t owe any interest charges on them.
Effect on credit score
Regularly paying credit card bills can improve your credit score, while late or missing payments can harm it.
Debit cards do not have any effect on your credit score.
Usage and purpose
Credit cards are helpful for those looking for rewards, flexibility, and building credit history.
Debit cards are ideal for budget-focused individuals who prioritise security and convenience without incurring debt.
Wrapping up
When choosing credit vs. debit cards, several factors must be considered, including your economic goals, spending habits, fees or charges, and more. Choosing a card that aligns with your requirements can help increase your credit score and help you meet your financial goals.
One of India’s most popular credit bureaus, TransUnion CIBIL, collects information from financial institutions to create detailed credit reports. To maintain a good credit history, it is essential to routinely make credit payments on time and check your CIBIL score.
FAQs
Which is better, a debit card or a credit card?
The advantages of debit and credit cards depend on your requirements. A credit card would be a good choice to build your credit score and obtain rewards. However, it would help if you opted for a debit card to maintain a strict budget and save more.
How do I know if a card is debit or credit?
Check for a label on the card that says "credit" or "debit." This is usually printed somewhere on the card's surface.
Which is a safe credit card or debit card?
Credit cards are considered safer because they offer better protection against fraud and let you dispute unauthorised charges. They also cannot withdraw funds directly from your account.
Do debit cards have a fee?
Debit cards do not have annual fees. However, users may be required to pay other fees for their checking accounts (like maintenance, overdraft, or foreign ATM fees).
Do credit cards have fees?
Credit cards have numerous charges, like annual fees, interest charges, late payment fees, foreign transaction fees, balance transfer fees, and so on.
16 December 2024
5 mins read
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