Difference between Credit Cards and Debit Cards
Credit cards and Debit cards, also known as ‘Plastic money’ have nowadays become one of the most commonly used cash alternatives. Most people carry at least one of these cards and use them to carry out all types of transactions, be it paying bills, online shopping, or even grocery shopping. These cards are very convenient to use and offer many perks to the user.
Both these cards typically look identical, bearing a 16-digit card number, an expiration date, and some other personal details. They both offer a lot of similar features, and fulfil purposes like withdrawing cash from the ATM, and making cashless transactions anytime, anywhere. However, the differences between the two cards are more than you can think of. The fundamental difference between a credit card and a debit card is where the money is being withdrawn or pulled from. A credit card uses a credit line which can be paid later, whereas a debit card uses your bank account for all the transactions.
What is a Credit Card?
A credit card is a card issued by a bank or financial institution, which allows you to borrow funds to make payments whenever required. You need not have money in your bank account to get a credit card and make payments. In other words, it is a type of an overdraft facility, where the value of the transaction is simply added to your outstanding balance and you need to pay back the borrowed amount within a stipulated time period.A credit card may have a spending limit, depending on the creditworthiness of the owner.
What is a Debit Card?
A debit card is a card that makes payments by deducting the amount of transaction directly from the customer’s bank account. They draw money directly from your checking account when you make the purchase and it is automatically transferred to the seller’s account. You would not be borrowing out of a credit line as in a credit card, the money on your debit card is your own.
Points of difference between Credit and Debit Cards
- Source of funds- When you use a debit card, money is automatically debited from your checking account. This means that you cannot use a debit card if there is no money in your account. Whereas when you use a credit card, the transaction is carried out and the amount of purchase is added to the outstanding balance or line of credit, the total of which can be paid later.
- Credit Limit- Credit Cards have monthly credit limits, which are determined by the type of card you have, your connection with the bank, and your creditworthiness. Debit cards can only be used up to the limit of your bank account balance. Your card may, however, have a daily purchase restriction set by the bank.
- Annual fees and Charges- A debit card is usually provided by the bank free of cost whenever an account is opened. Moreover, no annual fee or renewal fee is charged by the bank in case of debit cards. On the other hand, one needs to pay a joining fee and sometimes an annual fee to get a credit card. Banks also charge a fee for late payment of the outstanding balance.
- Interest- No interest is charged by a debit card holder. A credit card holder can be charged interest on the outstanding amount if it has not been paid by the due date.
- Lost card liability- If you lose a debit card, you need to act fast and report to the concerned bank as soon as possible since you do not get a very strong protection against theft or loss of the debit card. On the other hand, most credit cards 100% lost card liability protection. This means that the customer is not liable for any kind of unauthorised transactions made from the card.
Which is better: Credit card or Debit card?
Each card has its own uses and benefits depending on the individual.
For larger expenditures, you may want to consider using a credit card, but only if you are confident that you will be able to pay your payment on time. If you need cash, using your debit card rather than a credit card cash advance will save you money in the long run. When you pay cash instead of a credit card, you avoid getting into debt, which is a concern when you use a credit card.
Even while debit and credit cards have a lot in common, they also have a lot of distinctions. As a result, it is recommended that you conduct a detailed analysis and pick between the two options depending on your short- and long-term requirements.