What is the Difference Between a Debit and Credit Card?

Credit and debit cards are useful tools that can make your everyday life easy. Both types of cards offer their own unique set of benefits. If you are not sure which one would be best for you, our guide can help you gain a better understanding of both card types.

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What is a Credit Card?

A credit card is a financial product that allows you to borrow money from financial institutions, like banks, to purchase goods and services. Credit cards can be viewed as a type of loan; once the cardholder opens an account they are given a line of credit. This is known as the credit limit and is the maximum you can spend on the card before paying anything back. The credit limit is calculated through your credit history and income among other possible factors. At the end of each monthly billing cycle, the bank will send you a bill for your spending. Any balance that is not repaid by the payment due date will incur interest charges.

Credit cards typically offer rewards in the form of points, miles or cashback to its cardholders. Moreover, consumers can often earn elevated rewards for certain spending categories and at specific retailers with their credit card. This helps individuals capitalize on the purchases that they would have made with or without a credit card. Some credit cards provide consumers with other benefits like airport lounge access and movie theater tickets. High-end cards even provide cardholders with exclusive access to certain clubs and resorts. Credit cards also offer more protection for their cardholders in terms of fraud than debit cards. For example, if a cardholder lost their credit card and got charged, they can receive their money back by reporting it within a certain time frame.

However, credit cards have their fair share of downsides. For example, many cards come with joining and annual fees. This means that they come with an up front cost. Therefore, it is important to ensure that your rewards and benefits exceed the fees that you would payi. Alternatively, if you are unable or unwilling to pay an annual fee, you can look into no-fee credit cards, which offer similar benefits without incurring signup or annual fees.Further, borrowing money comes at a major cost. The money has to be paid back to the bank and if it is not by the end of the payment date, the cardholder will be charged an interest on the rollover balance (unpaid amount). In India the average interest rate for credit cards is 41.36% and can go as high as 50%. Other than interest cost, the misuse of credit cards may also ruin your CIBIL score—ruining your credit worthiness. A low CIBIL score can potentially take away your chances at applying for loans or other forms of debt.

Pros and Cons of Having a Credit Card
Pros:
  • Earn rewards on spending
  • Credit cards offer many perks and promotions
  • With proper usage you, can build you CIBIL score and credit history
Cons:
  • Risk of going in debt faster
  • If not careful, you can overspend easily
  • By missing payments, you can greatly hurt your CIBIL score

What is a Debit Card?

A debit card is also a method of paying for goods and services using a card, but instead of borrowing money from banks you are pulling from your own bank account. With debit cards, you will also need to have cash in your account at all times. If you are in a situation where you need to spend money, but have none in your account you will have to overdraft, which works like a short-term loan with extremely high interest rates.

Debit cards are useful for helping people avoid debt by keeping them within limits. Due to the fact that debit cards do not allow cardholders to spend more than what their account holds, it demands that they spend only up to a certain limit. Unlike credit cards, debit cards do not incur no joining or annual fees, which can be great for individuals that cannot afford to pay a fee. Debit cards are also less risky in terms of misuse, making it safer and easier to acquire from the banks. One of the largest positives for debit cards is that it is easy to pull cash out of ATM machines, unlike most credit cards.

On the other hand, the downside with debit cards is that so the only money you have to spend is what you have in your account. Further, you are spending directly from what you have in your account, reducing money that could be used for other things. Debit cards also provide less protection from fraud, once the money is pulled out or spent, it can be difficult to get it back. If you are a heavy spender and do not often check your account balance, you may spend more than what you have in that respective account. This can lead to overdraft and will cost a fee on all transactions done after you overdraft. Many ATMs will also charge a fee for the debit card used if the machine is not affiliated with the card issuer or bank of the card used. For example, a card from Bank A would incur an additional fee if used at a Bank B designated ATM machine.

Pros and Cons of Having a Debit Card
Pros:
  • Debit cards allow cardholders to pull out cash from ATM machines
  • Debit cards help cardholders avoid debt
  • Hard to overspend because you are limited to your account balance
Cons:
  • No rewards for spending
  • If funds run out then you will have to overdraft and have to pay high fees
  • Must be a priority banker to be eligible for this card
  • Overspending by going into overdraft can incur high fees

What Are Their Differences?

If you are interested in acquiring a card but are still unsure about which one may fit you best, looking at the differences of each option may help. Credit cards are better for actual spending and earning rewards on your purchases. Many of these cards are actually profitable over time if used correctly and have benefits that can ease and reduce costs of daily activities. For example, many cardholders receive special discounts on their grocery spending. Some of these benefits include airport lounge access, buy-one-get-one-free offers at various retailers, and restaurant vouchers.

Debit cards do not frequently have these benefits; however they are low risk in terms of accumulating debt and having to pay interest. Payment dates are crucial to have noted down and by missing the payments due on credit cards you can find yourself paying thousands of rupees down the line. Debit cards are only pulling from what you have, this way you are directly paying from your own funds, making it easier to keep your spending on track.

Which One Works for You?

Now that you know the differences between both card types, you can pick the optimal card that would best suit your spending needs. There is no correct number of cards you need to have. Many consumers have both debit and credit cards with some having a credit card for different types of spending. Although this takes a lot of careful budgeting, this is the best way to earn the most rewards. For example, if you cook at home frequently and drive to work every day, it may be best to get one credit card that earns an elevated rewards rate on grocery spending and another that has great rewards for fuel spending. By using both cards, you will be eligible to earn great rewards in both categories.

However, If you are the type of person who struggles with deadlines or are unorganized with your finances, then credit cards may not be suitable for you. Missed payments on credit cards can be detrimental to your CIBIL score. In this case, a debit card would be a much better option. A debit card would also be good to have as a backup card that you can use to access your account if you are facing issues with your credit card. In the end consumers often choose to use both credit and debit cards, but individuals most ultimately choose for themselves.

Sahmi Chowdhury

Sahmi is a Junior Research Analyst specialising in credit cards and insurance in India. He previously worked in the financial services sector at Brown Brothers Harriman and True Capital Management.