scorecardresearchWhat’s better: A credit card or debit card?

What’s better: A credit card or debit card?

Updated: 25 Apr 2022, 10:48 AM IST

A credit card allows you to borrow money for your usage at a predetermined interest rate whereas a debit card will let you spend your own money through a plastic card.

A debit card withdraws money from your bank and with a credit card, you can borrow money and pay it back over time.

A debit card withdraws money from your bank and with a credit card, you can borrow money and pay it back over time.

We can often notice similar features in a number of debit and credit cards. Like Visa and Mastercard, both cards are often imprinted with the logo of a major credit card firm and both can be used at retail establishments to purchase products and services.

On the other hand, a debit card withdraws money from your bank. With a credit card, you can borrow money and pay it back over time. As a result of their creditworthiness, a customer's credit line is determined by their creditworthiness, and they can choose how and when to spend the line of credit.

To offset overspending, a debit card may come with an overdraft line of credit linked to a customer's bank account. Consumers who attempt to spend more than the card's credit limit will have their cards refused.

Plastic currency today is as common as a smartphone, especially for the younger generations who are so used to getting everything digitally. But there’s always a question that bothers some of us.

What should we go for? A credit card or a debit card? Let us first understand how they work and the perks and disadvantages of both.

How do Credit Cards work?

Credit cardholders can borrow money from financial institutions with a credit card commonly provided by a bank and then pay it back with interest. As stipulated in the institution's rules, cardholders agree to pay the money back with interest. According to an individual's credit rating, issuers often pre-set borrowing limitations for each customer. Customer credit cards are accepted by the great majority of businesses today.

Now that we have understood what exactly is a credit and how it functions, let us discuss its pros and cons.

Pros of Credit Cards

Build credit history- It covers both positive and negative items, such as timely payments and low credit use levels. As a result, your credit scores are calculated using your credit report and credit bureau information.

Warranty and purchase protections- The retailer or brand's warranty or insurance may be supplemented by some credit cards. Suppose an item purchased with a credit card becomes damaged after the manufacturer's warranty has ended. Do check if the credit card company gives coverage in such a case.

Fraud protection- In most circumstances, credit cards offer more protection than debit cards. Customers must report loss or theft in a timely way to receive compensation.

Cons of Credit Cards

Spending can lead to debt- It is the bank's money you spend when you make purchases with a credit card, not yours. It must be repaid-with interest if it is borrowed. Each month, you must at the very least make the minimum payment. It could be tough to make monthly payments if you have huge balances on several credit cards.

Credit score impacts- Payments that are made late, the use of several cards, the closing of previous accounts and the application of new credit too frequently can all result in a negative credit history.

Interest and fees- What you spend on your credit card will be subject to interest charges because it is essentially a short-term loan. To compute your annual percentage rate, your creditor's interest rate and costs are taken into account (APR). Carrying a balance from month to month will cost you extra if the APR is greater.

Now let us understand a Debit Card and its functions

When a debit card is used, money is deducted directly from the consumer's checking account. "Check cards" or bank cards can be used to purchase products and services as well as withdraw cash from an ATM or a merchant who will allow you to add money to your transaction.

The debit card works the same way whether it's being used to withdraw cash or to make a purchase: It immediately withdraws monies from the account that's linked. You can only spend the money in your checking account, and the exact amount you have to spend will fluctuate day to day, along with your account balance, as you go about your daily routine.

You're often not allowed to spend more than a particular amount in 24 hours while using debit cards, too. With or without a PIN, debit card purchases are possible.

Now that we know how debit cards function, let’s take a better look at their pros and cons.

Pros of Debit Cards

Avoid debt- A debit card uses money that the user already owns, thus there is no risk of accruing debts. Consumers who pay with cards are known to spend more than those who pay cash. Retailers are aware of this fact. Impulsive spenders can escape the lure of credit by utilising debit cards and stick to their budget by using debit cards instead of credit cards. In this way, it is possible to stay out of high-interest debt.

Fraud protections- To prevent fraud and theft, you must notify authorities as soon as you become aware of it. Reporting fraudulent purchases within a specified time range determines your liability.

No annual fee- Debit cards do not impose an annual fee, as do many credit cards. Using your debit card to withdraw cash from your bank's ATM is likewise free of charge.

Cons of Debit Cards

Won’t build credit- It's all about proving to lenders that you're capable of repaying money borrowed responsibly. This is not possible while using a debit card that is linked to your bank account.

Fees- Though debit cards do not have yearly fees, checking accounts may have other costs. These can include monthly maintenance fees, overdraft fees if you overspend your account etc.

What’s Better- A Credit Card or Debit Card?

Credit cards and debit cards work on two completely different fundamentals. Therefore, comparing or choosing between them is an issue. Choices can be made with the things that have the same basic values rather than having a completely different basis of working. So, the dilemma here is not to choose, but to rather understand what suits you the best according to your needs, requirements and aspirations.

Now that we have understood how plastic currency works along with its pros and cons, it seems easier to decide what to go for. While Debit cards give more security, credit cards help to build the credit score which acts as a proof for the lenders that you will be able to repay your loans on time. This can be a huge advantage for students as they have to generally procure loans for higher education.

Things to know about credit card to avoid falling into a trap.
First Published: 25 Apr 2022, 10:41 AM IST