Credit cards and debit cards have virtually done away with the need to carry bundles of cash every time we go shopping. With just a single swipe, these cards assist us in making cashless transactions, both big and small.

Visually, a credit card and a debit card might seem alike, owing to the 16 digit card number, PIN and the expiration date. However, that is where the similarity ends as credit and debit cards are dissimilar in their functionality and usage. Let’s take a look at both these cards, understand their features and determine their best usage for different situations.

Credit Cards vs. Debit Cards

Credit Cards

A credit card is issued by a financial institution (like a bank) and allows the credit cardholder to borrow money from the institution (up to a specific limit) for making any purchase. Since credit cardholders are usually borrowing the required funds from their bank, they would have to agree to all the terms and conditions given out by their banks during the time of issue of the credit card, which include terms on the interest rate, late penalties, and repayment tenures.

As soon as you swipe a credit card for a purchase or withdrawal of cash, the money for the same would come from your bank. This amount would have to be returned by you (usually with an additional sum of interest) to your bank within a stipulated time frame. Generally, people choose to spend money using their credit cards and then repay the total amount at the end of the month.

There are four different types of credit cards:

  1. Standard Credit Cards: This offers a simple extended line of credit to its holder.
  2. Rewards Cards: These type of cards offer several benefits to the cardholder including travel points, cash back and much more.
  3. Secured Credit Cards: This would require the cardholder to deposit an initial amount which would be held by the bank as collateral.
  4. Charge Cards: These cards do not impose a preset spending limit on the cardholder, but they also would demand the payment of the unpaid balances every other month.

Now that we know what credit cards are and their varied forms, let’s take a look at some of their pros and cons.

Pros

  • With the use of reward cards, credit cardholders can reap several benefits like earning travel points, special cash backs, exclusive discounts and many other such benefits.
  • By timely repaying all their dues on the credit card, an individual can significantly improve his/her credit score; which can facilitate a smoother application of loans in the future.
  • At times, a credit card also covers the insurance or warranty of some items which you may purchase.

Cons

  • Whenever the payments and purchases are tangible, they tend to feel unreal. This is true in the case of credit cards, and that’s why several credit cardholders tend to overspend when they use their credit card for making purchases.
  • The interest rates on credit cards are generally very high.
  • Even though it is a negligible amount, credit cardholders are liable to pay a certain amount yearly for the use of credit cards.

Debit Cards

As of today, almost every individual has a savings bank account where they deposit their funds as savings. A debit card makes the process of withdrawing this money easier.

Whenever you have to make a purchase or withdraw money from an ATM, all you need to do is swipe your debit card. If the amount required is available in your bank account, you would be able to access it through a debit card and make the necessary purchase or withdraw it in cash. Unlike credit cards, debit cards source their funds from the customer’s savings account. When the debit cards are issued by some of the leading payments processors like MasterCard and Visa, they offer some benefits that are similar to that of credit cards.

There are mainly three types of debit cards:

  1. Standard Debit Cards: These debit cards usually function by deducting the money directly from your bank account when you make any purchase or payment.
  2. Electronics Benefit Cards: This type of card is issued by the federal and state agencies to permit the qualified cardholders to make use of their benefits in order to make the purchases.
  3. Prepaid Debit Cards: A sufficient amount is preloaded to this type of debit card. The payments and purchases made through this type of debit card do not require access to your bank account.

Let’s take a look at some of the pros and cons of a debit card:

Pros

  • You do not incur any debt when you use a debit card. Only the amount available in your bank account will be spent through debit cards.
  • There is usually no recurring annual fee for using a debit card which makes the debit cards rather inexpensive to use.
  • Even the retailers benefit when a debit card is used since the card swipe fees for debit cards is typically less when compared to the credit cards.
  • Even if you have had bad credit or no credit score, you can still get a debit card. The same is not the case with credit cards.

Cons

  • You would not get any significant benefits on spending cash using your debit cards like the discounts, cash-backs, and rewards.
  • Balancing your bank account sometimes becomes difficult if you do not monitor all the expenses through your debit card.
  • If the ATM where you use your debit card is not affiliated with your bank, you might have to pay a small fee each time you transact, depending on the terms of your bank.

Key Differences Between Credit Cards & Debit Cards

  1. Source of funds: When you withdraw cash or make a payment through debit card, the amount is deducted directly from your bank account. Whereas, whenever any payment or withdrawal is made using a credit card, the amount is borrowed from your bank which you would have to return within the given time (usually with interest).
  2. The volume of transaction: Debit cards prove to be beneficial when you use it for covering your day to day expenses no matter how small the amount. Credit cards prove to be beneficial when they are used for making slightly larger valued purchases like hotel reservations, car rentals, air ticket booking, etc.
  3. Amount capping: The maximum amount which can be withdrawn through a debit card is the total amount which is there in your bank account. In case of credit card, the maximum amount which the cardholder can withdraw depends upon the borrowing limit of the credit card, which is set by the banks.
  4. Repayment: The credit cardholder is liable to pay the withdrawn amount through the card within a fixed timeframe (usually 30 days). Whereas, in case of a debit card, the cardholder isn’t under any such pressure.
  5. Interest rates: Whenever the credit cardholder fails to pay the borrowed amount to the bank within 30 days, an interest rate would be charged on the total borrowed amount, but in case of the debit card, no such interest rate is charged as the amount has not been borrowed from the bank.

Credit cards vs. Debit Cards: Which one is better?

While both debit card and credit have advantages and disadvantages of their own, the decision regarding which is better would vary from one individual to another. Some users believe that in terms of convenience and security, debit cards are far better than credit cards. This is because through the debit card you would spend well within your financial ability, but while using credit cards, users would often get tempted to spend a little extra. Repaying this extra amount may not be possible immediately, and over a period of time the credit cardholder would ultimately end up with debt, which would include the borrowed amount along with the interest rate on it.

This seems to be a major disadvantage of using a credit card. However, if a person manages their finances well, a credit card can be far more beneficial when compared to a debit card. All the credit card companies abide by strict liability laws. In addition to being linked strictly to the liability laws, credit cards also offer better protection to the consumers on the purchases made by them. This means that if in case you use your credit card to buy a product and if that product gets damaged en route, the insurance by your credit card company would cover it.

The bottom line is that you need to do your research about both credit cards and debit cards and choose the one which suits your needs the best. For example, debit cards are perfect for the small expenses like buying groceries, spending on shopping, etc., while the credit cards are suited best for expenses like renting a car, reserving a hotel, and other such expenses. Every cardholder needs to be extremely careful while using credit cards as well as debit cards. While overspending on your credit card may leave you burdened under huge debts, improper usage of debit card would drastically affect your monthly finances.