The convenience, ease of use and security afforded by plastic currency has made. Credit and debit cards the most popular cash alternative in the modern world. Most young Indians, either salaried or businessmen, carry at least one of these cards (either credit or debit) and use them for regular transactions like ATM cash withdrawals, fuel, bill payment, grocery purchase as well as bigger transactions including fee payments, flight bookings and consumer durable purchases. In spite of the fact that both credit and debit cards are extremely common, there continues to be a raging debate regarding which is the preferred alternative.
Let’s try to understand the difference between the two cards and list the benefits of using credit card over debit card.
What is the key difference?
In terms of appearance, both cards may look similar, containing a 16-digit card number (some credit and debit cards have a shorter card number) along with the expiry date and a 3-digit card verification value (CVV) number on the back of the card. Except that, everything else is different. Debit cards are linked to the bank account of the user. Once swiped, the card directly debits funds from the money available in the bank account linked to the card, subject to a daily withdrawal/purchase limit decided by the bank.
Credit cards on the other hand are like a line of credit offered by the banks and are linked to a credit card account that features a pre-defined limit. This card is issued by the banks on the basis of eligibility and credit history of the applicant. Once swiped, the bank pays the amount to vendor and the debits are added to the card holder’s account, which, in turn the cardholder needs to pay back to the bank within a stipulated time period.
Where credit card is better?
The key benefits of a credit card over debit card are as mentioned below:
Rewards: There are various type of credit cards offering rewards such as air miles, fuel points, and cash back rewards. These benefits are often not present on the debit cards. Effective utilisation of credit cards can help the users earn more points and utilise these points forfuture transactions. For example, many banks offer air miles card that gives air miles rewards based on the amount spent by you with the card. The miles can then be redeemed in lieu of free flights, cabs or hotel bookings.
Interest-free repayment period: The money spent via debit card instantly gets debited from the account it is linked to. However, in case of credit cards, the payment is done by the bank to the vendor and no amount gets deducted from the card holder. The card holder can make the payment within the grace period decided by the bank (typically 45-50 days). This can help the user in two ways. Firstly, he/she need not to check the bank balance while transacting and secondly, he/she gets an interest free period on the transaction.
Equated Monthly Instalment Facility: This is a very popular proposition. Using credit cards, buyers can purchase expensive items like mobile phones, electronics and pay the due amount on such big-ticket purchases over 3, 6, 9 and 12-months or even longer durations using EMI.This provision is not available in the case of debit cards.
Improvement of CIBIL Score: Credit ratings have now become the base for loan eligibility and approvals by all the banks and financial institutions. Payment of the credit card dues by the due date can help the users improve their ratings. On the flip side, not paying your credit card dues on time is certain to impact your credit ratings negatively. In the case of a debit card, there is no impact on the credit ratings as it is not a credit instrument.
Added Security and Protection: Credit cards provide better safety as compared to the debit cards in case of lost/stolen cards or unauthorised transactions. Any fraudulent transaction via debit card means amount deducted from account instantly whereas in credit card it can be contained provided the reporting is done by the card holder within stipulated time of the discovery. Additionally, you benefit from Credit Card Protection Plans and the chargeback option that is available only on credit cards and not on debit cards.
Credit cards, if used smartly and by someone with good financial discipline, can provide huge benefits to the card holder. However, if you are an impulsive shopaholic and use the card without efficiently planning the repayment part, then better stick to debit cards as they limit your chances of spending beyond your means.