Credit Cards Vs Debit Cards

We are living in times when most people use either a debit or credit card to complete their money-related transactions, such as shopping or paying for air tickets. Debit and credit cards may look exactly alike, but they are inherently different instruments, with different uses.

How are debit and credit cards different?

Debit cards are linked to your current account or your savings account and can only be used to carry out transactions up to a certain limit. You can only use your debit card to pay money that you already have in your checking account or if you have an overdraft facility then to the limit of the overdraft. In this way, you can call debit cards ‘modern-day digital cheque books’.

Conversely, credit cards  are not linked to your checking account. They are a type of loan that banks advance to you in lieu of your purchases, to be paid back at a later date. To be more clear, when you make payments using your credit card it is the card-issuing bank that pays the money on your behalf and you have to pay back the bank. If you fail to square your dues on time, the bank will slap you with a hefty interest bill.

Here are a few remarkable differences:

Monthly bills: Since your debit card can only be used to pay money that you already have, there is no monthly bill involved. All that the bank charges on your debit card is a minimal fee to allow you to use the card.  Payments made using credit cards are loans that the banks give you, which you need to pay back on a monthly basis (before a set date).

Application process: The application process to get a debit card is relatively simple. If you have money in your checking account, all you need to do is apply for a debit card and the banks will approve your application. Credit cards offer line of credit; hence, banks will only approve your application for issuing a credit card if you have a good credit score.

Security cover: Debit cards are used to take out cash from ATM machines or for shopping with money that you have in your linked bank account. They have card protection, but not like a credit card. Credit cards offer you a line of credit and have insurance and safety measures to protect you from fraudulent transactions.

Thus, debit and credit cards are very different in the way they are used and procured. They might look the same, but if you have both types of cards, you should use them wisely as the circumstances demand. In general, credit cards should be used with more care because you are essentially taking a loan from the bank when you use these.

Disclaimer: Copyright Kotak Mahindra Bank Ltd.