Difference between Credit card and Debit Card: Which is better?

Making a payment using either a debit card or a credit card is the same. You swipe/tap your card at a POS or enter your card details at a payment gateway, and the purchase is made. The main difference lies in how these payments are processed. Let's understand the difference between credit cards and debit cards while ascertaining which type of card works well for you. 

Difference between Debit and Credit Card

*Non-Banking Financial Corporation(s)

What is a Credit Card?

 A credit card, in simple terms, refers to borrowed plastic money. Why “plastic” money? Because of the design of the card, i.e. a rectangular plastic card with card details stated on it. And why the term “borrowed”, you ask? The concerned financial institution pays the payment made through a credit card to the merchant, which the customer later repays to the bank. 

Who can get a credit card? 

To get a credit card, you should be someone with a steady income. Salaried persons find it easy to get a credit card than those who aren't, say, freelancers. There are multiple factors considered when sanctioning a credit card, viz. applicant's credit history, and credit score, past credit behaviour, if any, age, type of employment, among others. 

Pros & Cons of Using Credit Cards

Like any other thing in the world, a credit card also comes with its own set of advantages and disadvantages. Let's learn about these: 

Pros of using credit cards

• Earn rewards that can be redeemed later to purchase merchandise 
• Cashback and discounts offered on most credit cards to help save as you spend 
• Exposes customers to credit, thus building their credit history 
• If payments are made on time, one’s credit score can improve (a good credit score may help get a loan in future)
• It comes handy in times of emergency 
• It makes customers efficient in managing their finances

While the benefits of using a credit card are many, there are some disadvantages if a credit card is not handled properly. These areas stated below: 

Cons of using credit cards

• Too much dependency on the credit card may lead one into a debt trap 
• Interest is levied if the bill is not paid in time, i.e. on or before the due date 
• If the card’s APR* is high, you will pay heavy charges on the balance that you carry forward
• Depending on your card, you may be charged annual fees 
• Some cards come with fees on cash advance, foreign transactions, etc. 

*Annual Percentage Rate – Rate that is charged by the credit card provider for borrowing. 

What is a Debit Card?

A debit card is another type of plastic money that can be used instead of cash. The amount swiped is directly debited from the bank account of the customer. 

Who can get a debit card? 

Anyone with a bank account is eligible to get a debit card. Though as per the RBI guidelines, those with a stable financial standing are the ideal candidates for a debit card. 

 Pros & Cons of Using Debit Cards

Just like a credit card, a debit card also has certain merits and demerits attached to its usage. These are mentioned below: 

Pros of using a debit card

• Zero-interest on purchases made 
• Ideal in making daily payments like groceries, etc. 
• Help keep one’s budget in check 
• No annual fee to be paid 
• No joining fee (mostly)
• It can be used to withdraw money from ATMs as well
• It won't have any effect on your credit score, i.e. even if you don't use it for months, your credit score won't go down (and neither up)

Cons of using a debit card

• It will not work if your checking account has zero balance; a credit card comes in handy in such cases.
• If you overdraw, you might have to incur heavy charges
• It does not lead to any credit exposure (for those meaning to get a loan in future, a debit card won't help in building a credit history which is an important factor considered by banks while assessing a loan application)

Credit Card vs Debit Card - Which one Should I Opt?

Is a credit card good for me? Should I continue with my debit card only? These are some of the valid questions coming into the minds of those who are new to credit. The answer to these queries lies in your needs. 

If you're someone who doesn't spend much or do not have a stable source of income yet, getting a credit card may not be of much use to you. Why, you ask? The answer is simple. Treat your credit card as a loan. An ideal situation to take a loan is where one has a genuine need coupled with a capacity to repay the loan amount, i.e. principal plus interest. If not, we try to limit our expenditure and sort our needs accordingly, except if it's an emergency. And those who are more of a spendthrift, a credit card may lend them in heavy debt. 

Similarly, if you're planning to get a loan in future, say a home loan or an education loan, your credit history shall matter. If you're not exposed to credit, the banks won't have anything to analyse your credit behaviour. This might make you a risky loan applicant. 

Having a credit card shall help you understand how credit works and help build your credit history. If handled properly, your credit score shall improve, and this would be a good marker for the banks to consider you as a good candidate for giving a loan.  

Also, if you frequently travel, primarily via flights or go for dinners often, a credit card might become a boon if used properly. There are specific dining credit cards that offer 1+1 on drinks and/or meals while also offering good cashback deals. Likewise, many banks provide specially-made travel cards that offer deals and discounts on flight bookings as well as hotel booking, which may include VIP lounge access, complimentary meals, rewards on each spending, etc. 

So, whether you should get a credit card or not depends on your expenditure, your current financial stability and your future needs likewise. 

FAQs

✅Are prepaid cards similar to debit cards?

No, Prepaid cards are cards where you load a specific amount and use it for making transactions. The money is not debited from your bank account but from your prepaid card itself. A debit card is linked to your bank account, and the amount is deducted (debited) from your bank account. The debit card itself has no value if your bank balance is zero. 

✅Can a credit card improve my credit score?

Yes. If you use your credit card up to 30-40% of its limit and also pay your bills timely and in full, your credit score is likely to go up. 

✅Why is it important to have a good credit score?

A good credit score helps mainly in two things, viz. 1. Getting a loan in future, and 2. Getting a credit card with better benefits. 

✅Does a debit card fetch annual fees or interests? 

No. A debit card does not fetch any annual fees or interests. However, if you overdraw on your debit card, you may be levied with a penalty. 

✅Can I use my credit card to withdraw money from ATM?

Yes, you can use your credit card at an ATM if the facility is offered by your provider. However, it will fetch hefty charges.