Difference between Credit Card and Debit Card

The main difference (and similarity)

The primary difference is where the money comes from.

On using a debit card, the amount is immediately deducted from your bank account while in case of credit cards, your card issuing bank pays the merchant.

Then, the bank sends you a credit card bill and you pay back the bank. If you pay back the full amount, there’s no interest levied and your credit limit is restored for future purchases.

Both credit cards and debit cards are widely accepted and can be used to make purchases at stores, restaurants and online, eliminating the need to pay in cash.

Advantages of credit card

The biggest advantage of a credit card is reward points.

Typically the higher up the card ladder you go, the higher benefit you can accrue in the form of reward points and privileges. You are also able to use offers given by various merchants only for credit card holders of a particular bank.

When traveling abroad, a lot of hotels and rental car companies need a credit card on file to make a reservation. The same goes for software trials and PayPal transactions which don’t accept debit cards at all.

Credit cards also come in handy in emergencies to withdraw money or make essential purchases. The charges and interest rates though are substantial. An emergency fund and budgeting are better options to deal with such situations.

Advantages of debit card

With debit cards, you don’t run the risk of spending beyond your means.

You don’t get carried away as you’re spending capacity is limited to the amount available in your bank account. Since you’re using your own money, there are no bills to be paid or payment due dates that need to be tracked.

Purchases are made with the same convenience as credit cards without the hassle of borrowing money, interest rates or charges. At the end of the month, your bank sends you a statement that you can use to track your expenses and manage your money.

Debit cards also double up as ATM cards that can be used to withdraw money from your bank account.

Should you use a debit or credit card?

It depends on your spending habits.

With credit cards, you can earn and collect reward points redeeming them for flight tickets, hotel stays and gift vouchers. You can also get rewards for paying your credit card bills. However, this only works if you always pay your credit card dues in full every month.

If you tend to get carried away, spending more than you’re earning; make impulse purchases or are a bit of a spendthrift, it makes sense to stick only to debit cards. With credit cards, you may be able to save or benefit in form of rewards or privileges but you’ll end up paying much more in interest amount and charges risking a credit card debt that snowballs quickly.

In case of a debit card, since the money is coming from your bank account, you won’t be able to overspend and get into credit card debt

Conclusion

Over recent years, the lines between a credit card and debit card have blurred.

Many debit cards now offer Debit Card EMI, reward points, offers like discounts on movie tickets and lounge access privileges.

When deciding between a credit card and debit card, you need to be very honest with yourself and ask if you can handle the spending power. If you can, go with a credit card, otherwise, opt for a debit card instead.