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Disclaimer: This Article is for information purpose only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank make no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.
31 MAY, 2022
The advent of plastic money changed the game for the banking and financial services industry. A revolutionary financial innovation laid the foundation for a cashless economy. Debit cards and credit cards have grown in popularity over the past two decades, and most adults use either one of the two for managing their finances. However, there is an age-old debate on which is better, a credit or a debit card? The answer to this question is highly subjective and far from simple. These plastic money variants have their own set of pros and cons. Let’s dive into what both entail to learn better.
What is a debit card?
A debit card can be explained as a financial tool for making payments through a chip-enabled card. It uses the balance available in the savings or current account of the user. When you purchase using a debit card, the amount is directly deducted from your primary bank account (issued by the debit card company). If you don’t have a sufficient balance in this account, the transaction will fail to process. A debit card can be easily used to withdraw cash from ATMs by paying very little to no fee. Anyone who has a bank account can get a debit card.
What are credit cards?
Credit cards are also a financial tool designed to make payments for purchases, whether online or offline. You can access this card depending on the credit limit set by the card-issuing financial institution. To simplify, it can be understood as a pre-specified bank overdraft available at your disposal. You can choose to pay the entire amount due on a credit card at the end of each billing cycle. Alternatively, users can choose to repay the minimum due amount each month.
Key differences between a debit and a credit card
Now that we have a brief overview of what each card entails let’s compare both and find out the credit and debit differences.
1. Source of funds
In the case of a debit card, the funds available to make purchases are related to your savings or current account. However, in the case of a bank credit card, the funds available are from a credit extended by the card-issuing party. It offers you access to funds that are not yours initially.
There is no billing cycle or bills generated for debit card purchases. Credit card companies provide bills for all the purchases made using a credit card. This bill contains all the details of transactions conducted using the credit card within the billing cycle.
3. Credit history
A credit card can help build a credit history since it is a form of debt instrument. The credit history determines the credit score. However, a debit card cannot help build a credit history since it is linked to a savings or checking account that contains your own money.
4. Interest fee
Since bank credit cards are debt instruments, users have to pay an interest fee on the outstanding balance if they fail to repay it by the due date. However, the interest rate charged can differ depending on the lender’s policies and the cardholder's credit profile. In the case of a debit card, there is no interest fee because the card user totally owns the funds.
5. Annual fees
Most debit cards come free with the bank account opened by users. There is little to no annual fee, depending on the card chosen by the user. However, most credit cards do levy a yearly fee, which the cardholder is liable to pay. In many cases, the annual fee is revoked if the user spends over a threshold amount set by the card issuer.
Why you may prefer a credit card over a debit?
Here’s why you may choose a credit card over a debit card in the contemporary era.
1. Reward points
The most important benefit of a credit card are the reward points. Cardholders are incentivized with reward points to spend money using their credit cards. These reward points can be redeemed for discount offers or transferred as cash balance to your account, depending on the type of credit card you own. Different types of credit cards offer varied rewards suitable for the user. For example, a travel credit card can provide special discounts on hotels and flight tickets. Most eCommerce site provide additional discounts on credit cards.
2. Builds credit history
Another significant advantage that makes credit cards stand out from the competition is that it helps to build a credit history. Responsibly using a credit card can help you build a good credit history and score. This will allow you to avail of significant credit amounts in the future. In addition, a higher credit score can help you get better terms on your loan and even a higher loan amount.
3. Universal acceptance
Credit cards are universally accepted as a method of payment which might not be accurate for debit cards. Many companies accept credit cards as payment methods but not debit cards. This is true for most recurring payments. Most credit cards can also be used to make international payments seamlessly..
4. Grace period
You can spend up to the pre-specified credit limit without worrying about immediate bill payments. Even after the billing cycle, credit card companies offer a grace period to cardholders for making the bill payments. The interest charges are not levied on the outstanding balance during the grace period.
5. Insurance and safety
Most credit cards come with insurance to safeguard the borrowers against unfavorable events such as theft or loss of cards, cyber fraud, unauthorized payments, etc. Moreover, payment made using a credit card also helps avoid losses in case of fraudulent activities.
Credit cards can be a tremendous financial asset at your disposal, only if you know how to use them wisely. It can help you build a credit history, avoid losses during fraudulent transactions, receive reward points, and much more. Unfortunately, these benefits are not offered by debit cards.
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