Credit cards vs. Debit cards: How Are They Different?

Credit and Debit Cards are two popular financial tools. However, they have distinct features and serve different purposes. Understanding these differences is important for making sound financial decisions. So, let us understand them better.

Source of funds

·       Credit Cards

When you use a Credit Card, you borrow money from the card issuer up to a predefined credit limit. You need to repay the borrowed amount by the due date to avoid interest charges.

·       Debit Cards

Debit Cards are directly linked to your Bank Account. When you purchase anything using a Debit Card, the funds get instantly withdrawn from your account.

Credit limit vs. account balance

·       Credit Cards

Credit Cards have a fixed credit limit, representing the maximum amount you can borrow. This limit is decided and set by the card issuer depending on your credit history, income, and other financial factors.

·       Debit Cards

Debit Cards have no credit limit. Instead, they are directly tied to the available balance in your Bank Account. Your spending is limited to the funds you have in the account.

Building credit history

·       Credit Cards

Responsible Credit Card use, such as making timely payments and managing credit balances, can positively impact your credit score. A good credit score is important if you want to secure Loans and enjoy favourable interest rates.

·       Debit Cards

Debit Card transactions do not contribute to your credit history or affect your credit score. They are simply a direct means of accessing your funds.

Interest charges

·       Credit Cards

If you maintain an outstanding balance on your Credit Card beyond the grace period, which is the period between the end of the billing cycle and the due date, you will accrue interest charges on the remaining amount.

·       Debit Cards

Since Debit Card transactions are directly linked to your account balance, you do not incur interest charges. However, be mindful of potential overdraft fees if your account balance is insufficient.

Protection

·       Credit Cards

Credit Cards often provide strong fraud protection. Many issuers offer zero-liability policies for unauthorised transactions.

·       Debit Cards

Debit Cards also have fraud protection. However, the liability limit is higher and depends on how quickly you report the unauthorised transactions.

Rewards and perks

·       Credit Cards

When you apply for Credit Card online, you get access to reward programmes, cash back, travel perks, and other incentives. These benefits vary depending on the type of Credit Card you choose.

·       Debit Cards

Debit Cards do not offer as many rewards or perks. While some Debit Cards may have cashback programmes, their validity depends on a bunch of factors. Credit Cards, however, often provide a host of offers and rewards if you use the card responsibly.

Conclusion