Difference Between Debit Card and Credit Card
Updated: Dec 17, 2024
Although they have similar looks, credit cards and debit cards work in different ways. A debit card allows you to make purchases using funds from your current account or savings, whereas a credit card is a short-term loan that you must return to the card provider. For routine transactions like ATM cash withdrawals, petrol, bill payments, and grocery purchases, as well as more significant ones like fee payments, airline reservations, and consumer durable purchases, the majority of young Indians, whether employed or entrepreneurs, carry at least one of these credit or debit cards. Nevertheless, few consumers are aware of the primary distinctions between a debit card and a credit card, as well as which is superior. This article highlights the main distinctions between credit and debit cards.
Table of Content
What is a Debit Card?
With a debit card, you can spend money that you already have because it is immediately connected to your bank account. The amount is promptly taken out of your bank account when you make a purchase with a debit card. When you open a checking or savings account, your bank or credit union usually issues debit cards.
Features of a Debit Card
Instant Deduction: At the moment of sale, money is taken out of your bank account right away.
No Interest Charges: Transactions are free of interest since you are paying with your own funds.
Access to ATMs: ATMs accept debit cards for cash withdrawals.
Spending Limit: The amount in your bank account is your spending limit.
Pros of a Debit Card
They help minimise the risk of debt. One effective strategy to lower your risk of debt is to use a debit card rather than a credit card. You should be able to stay within your budget and avoid using up all of the funds in your checking account by using this payment option. Your bank may impose an overdraft or return fee if you ever spend more than your checking account permits.
A debit card can help you easily access your money. ATMs allow you to take out cash using your debit card. You can also receive "cash back" from certain retail establishments, which entails charging your checking account more than the original transaction amount and then handing you the money back along with your receipt.
To prevent a debt later, pay now. You don't have to worry about receiving a bill at the end of the month because the funds from a purchase you make with your debit card are deducted straight from your checking account. Additionally, this eliminates the possibility of interest accruing on that bill. A debit card might help you keep tabs on your spending, but watch out for return and overdraft fees.
Cons of a Debit Card
Limited Fraud Protection: Compared to credit cards, debit cards often have less effective fraud protection.
Overdraft Fees: You might be charged overdraft fees if you spend more than your account balance.
No Credit Building: Neither your credit history nor your credit score is enhanced by using a debit card.
What is a Credit Card?
You can make purchases with a credit card by borrowing money up to a predetermined limit from the card issuer. If you fail to pay the entire sum by the due date, you will be required to repay the borrowed amount, usually with interest.
Features of a Credit Card
Credit Limit: The highest amount you are permitted to borrow, as established by the card issuer in accordance with your creditworthiness.
Interest Charges: If the entire payment is not paid by the due date, interest is assessed on the outstanding balance.
Impact on Credit Score: While improper use might lower your credit score, responsible use can raise it.
Benefits & Rewards: A lot of credit cards come with benefits like travel points, cashback, and other advantages.
Pros of a Credit Card
You have more time to pay for things when you use credit cards. A bill detailing the amount you owe for transactions made over the last 30 days will be sent to you at the conclusion of your monthly credit card cycle. You have a few weeks to settle your credit card account, depending on when you made the purchase. Although you are only technically obliged to pay a minimal amount each month, this could result in further debt.
Using a credit card creates a credit history. Your credit history will accumulate each time you make a transaction with your credit card and make timely payments. When taking out a loan or purchasing a home or vehicle, having good credit is crucial. You may raise your credit score and demonstrate your ability to pay off debt by paying off your credit card account each month.
In an emergency, having a credit card is very practical and helpful. You can charge your credit card if you need to pay for a home repair out of the blue. Your credit card company will give you credit in this instance till you pay the payment at the end of the month because you most likely did not budget for this spending. Once more, this allows you a little more time to pay for something you didn't anticipate having to do.
Cons of a Credit Card
Interest Charges: If balances are not paid on time, high interest rates might result in substantial debt.
Risk of Overspending: Having the opportunity to borrow money can result in excessive spending and poor money management.
Effect on Credit Score: High balances and late payments might have a detrimental effect on your credit score.
Differences Between Debit Card and Credit Card
Where the money comes from and how much you can use are the main distinctions between a debit card and a credit card. When you use a debit card, the funds are taken straight out of your current or savings account. As a result, the transaction limit is determined by how much you have invested in each of the aforementioned accounts. On the other hand, a new credit card account will be created when you apply for one. The lender determines the possible limit on this account by taking into account your income, credit utilisation percentage, and CIBIL score.
Additionally, since debit cards take money straight out of your current account or savings account, you are not required to pay back the balance. Conversely, with a credit card, monthly repayments have to be made according to the purchases made. Each month, you can choose to pay the minimum amount owed, a little more than the minimum amount owed, or the entire amount owed on your card. Additionally, you will have a specific deadline by which to complete this payback. Keep in mind that you have 45 to 50 days, or the grace period specified by the card issuer, to make the credit card payment.
You can raise your credit score by paying your credit card bills on time. Conversely, failing to make your credit card payments on time will undoubtedly have a bad effect on your credit scores. Since a debit card is not a credit instrument, its use has no effect on credit scores.
There are fewer services offered by debit cards than by credit cards. You can be qualified for a number of perks, including freebies and discounts on your purchases, depending on the kind of credit card you now hold. With every credit card transaction, you can also accrue reward points that you can use to offset specific future expenditures. You can also choose to convert your credit card transactions into EMIs. Unless there is a current promotion on your debit card in accordance with an agreement with a chosen seller, you typically do not have this feature with debit cards.
When it comes to lost or stolen cards or unauthorised transactions, credit cards offer greater security than debit cards. When a debit card transaction is fraudulent, the money is immediately taken out of the account; when a credit card transaction is fraudulent, the available funds are unaffected. You must, however, make sure that you notify the card issuer of any loss or misuse of the card right away by getting in touch with their customer service.
The following table shows a brief overview of the key differences between debit cards and credit cards:
Particulars | Debit Card | Credit Card |
Funds Availability | Deducted from your savings/current account | Borrowings from the card issuer |
Spending Limits | Up to the balance available in your savings/current account | Within your pre-fixed credit limit |
Advantage | Saves you from debt-trap | Short term loan according to your credibility |
Purchases | Pay directly from your bank account | The card issuer pays for you and you pay back by the due date |
Statements | No specific billing statements; mentioned in the savings/current account passbook | Billing statements for each cycle with all spends you make with the card |
Fee & Charges | Cash withdrawal fee, annual fee (in some cases), etc | Joining fee, annual fee, interest charges, late payment fee, etc |
Interest | No interest charges | Interest rate charges in case of late payment |
Rewards and cashback | Minor benefits | Extensive benefits |
Repayment | No Repayments | Monthly Repayments |
EMI Facility | On limited transaction as per vendor-bank agreement | On transactions above Rs. 2,500 (vary across issuer) |
Impact on Credit Score | No direct impact | Direct impact |
Conclusion
When used responsibly and by someone with sound financial management skills, credit cards can offer the cardholder many advantages. Debit cards, on the other hand, reduce the likelihood that you will spend more than you can afford, so you should stick with them if you are an impulsive shopper who uses the card without carefully arranging the repayment portion.
FAQ
Q1. What is the difference between debit and credit cards?
The money for the purchase is nearly immediately deducted from your checking account when you use a debit card. Using a credit card allows you extra time to pay because the amount will be applied to your line of credit, allowing you to make the payment later.
Q2. Are credit cards safer than debit cards?
In general, credit cards are a safer option than debit cards because they are much more likely to provide actual zero liability protection in the event of fraud. However, there are ways to avoid possible fraud while you shop online, travel, or go about your daily life, regardless of the payment method you choose.
Q3. Which is better: debit or credit card?
Using a credit card to make purchases has several advantages, including better credit history, more brand discounts, insurance against loss or theft, longer warranties on gadgets, etc. This isn't the case with debit cards, though you can still get exclusive offers.
Q4. Are credit cards good or bad?
One drawback of credit cards is their high interest rates, which can quickly lead to growing debt levels. However, you can profit from rewards and a high credit score if you pay off your bill in full and on time.
Q5. Can I withdraw money from an ATM using my credit card?
The majority of credit card providers permit their customers to use their cards at ATMs; this will appear on your credit card statement as a cash advance. Although you aren't taking money out of a bank account, you may use your credit card at most ATMs just like you would a debit card.
Q6. What is the main difference between a debit card and a credit card?
The main difference lies in the source of funds. A debit card directly withdraws money from your bank account, while a credit card allows you to borrow money from the card issuer, which you repay later.
Q7. Can I use a debit card for online shopping?
Yes, debit cards can be used for online purchases, but they require you to have sufficient balance in your account. Some online stores may also require additional security for debit card transactions.
Q8. Do debit cards charge interest like credit cards?
No, debit cards do not charge interest since the payment is made immediately from your bank account. Credit cards, on the other hand, charge interest if the balance is not paid on time.
Q9. Which is better for emergency situations: debit or credit card?
Credit cards are generally better for emergencies, as they offer a credit limit, allowing you to make purchases even when you don’t have funds readily available.
Q10. Are debit cards safer than credit cards?
Debit cards are generally secure, but they can be riskier because if compromised, it directly affects your bank account. Credit cards, however, offer better fraud protection and limited liability.
Q11. Can I get rewards or cashback with a debit card?
Some debit cards do offer rewards or cashback, but the benefits are usually less than what credit cards offer. Credit cards are designed specifically for rewards and perks.
Q12. What happens if I exceed my debit card balance?
If you try to spend more than the available balance, the transaction will typically be declined. However, some banks offer overdraft protection, which can result in a fee.
Q13. How does a credit card affect my credit score?
Responsible use of a credit card, like paying off the balance on time, can positively impact your credit score. However, missing payments or accumulating high debt can harm it.
Q14. Can I use both a debit card and credit card for the same transaction?
Yes, many merchants allow splitting payments between multiple cards, such as a debit card for part of the payment and a credit card for the rest.
Q15. Which card is better for international travel: debit or credit?
Credit cards are generally preferred for international travel, as they offer more security, travel insurance, and the ability to handle currency exchange more easily.
Q16. Can I get cash from an ATM with a credit card?
Yes, you can withdraw cash from an ATM with a credit card, but it’s called a cash advance, and it usually comes with higher fees and interest rates than regular purchases.
Q17. What is the credit limit on a credit card?
The credit limit is the maximum amount the bank allows you to borrow on your credit card. It is determined based on factors like your income, credit score, and payment history.
Q18. Are debit cards accepted everywhere credit cards are?
Debit cards are widely accepted, but certain merchants or situations may require credit cards, especially when dealing with large transactions or booking hotels and car rentals.
Q19. Can I use a debit card to book a hotel or car rental?
Debit cards are sometimes accepted, but they may require a hold on funds, and some companies may prefer credit cards for booking. Always check the policies of the merchant beforehand.
Q20. Is it possible to upgrade a debit card to a credit card?
Yes, you can apply for a credit card separately and, if approved, upgrade your debit card to a credit card. Some banks may offer this option after evaluating your financial profile.
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