Credit Card vs Debit Card: What sets them apart

Credit and debit cards are the most important tools in managing money and making transactions in today's financial world. However, though they look alike and are used in almost all places alike, credit and debit cards have very different features, benefits, and uses that notably influence your financial health. The following guide explains many of the differences between credit and debit cards. This will allow you to confidently, with dignity, operate and know how to make your right choices of which to use and when.

What is a Debit Card?

A debit card is linked directly to one's checking account. With every purchase or withdrawal of cash through an ATM using a debit card, the money is instantly subtracted from your account balance. In other words, you are using your money that you already have in the bank.

What is a Credit Card?

A credit card, on the other hand, allows one to make purchases or obtain cash up to a certain limit with borrowed funds. Each time you use a credit card, you are, in effect, taking out a short-term loan, which you will be required to pay off, typically each month. The interest is charged if you do not clear your full balance every month.

The Key Differences Between Credit and Debit Cards

1. Spending Limits

Debit Card: Your spending limit is the amount of available money that you have inside your checking account. You might get declined, or even slapped with an overdraft fee if you try to spend more than what's inside your account.

Credit Card: Packaged in this factor is the credit limit by the issuer; that is, the amount of money you are allowed to spend on your credit card as determined by the issuer based on your creditworthiness. You can spend up to this much before extra costs like interest kick in.

2. Impact on Credit Score

Debit Card: No impact on a credit score with a debit card, since the funds actually are from the bank account—in that sense, no element of borrowing is involved.

Credit Card: A credit card, when used responsibly, can build your credit score. Good credit history is guaranteed through timely payments and low balances relative to the credit limit.

3. Interest and Fees

Debit Card: Normally, no interest is charged on debit card transactions because you use your own money. Although overdraft fees may be charged on expenses higher than your account balance.

Credit Card: You will be charged interest if you carry a balance on your credit card from month to month. In addition, there may be an annual fee, late fee, and over-limit fee with your credit card.

4. Consumer Protections

Your consumer protections on debit card transactions are much weaker than with credit card transactions. You could be held liable for a loss from fraudulent charges if your card is lost or stolen, but you don't report the bank in a timely manner. There is some zero liability protection on some debit cards but that will vary with the issuer.

Credit cards usually afford consumers better protections. 

5. Debit Card Rewards and Benefits

While some, but not all, debit cards have a rewards program, they are usually less generous than credit card rewards. You might find cash back on certain purchases or money-off at specific retailers with a debit card reward.

Credit Card: Somebody gets attracted to a credit card due to its multiple rewards system features. These would include cash backs, travel points and so on. Besides, most of them give extended warranty, purchase protection, and travel insurance.

When to Use each Card?

Debit Card

It is best applied when one requires not to fall into debt and interest charges. The only good way to use a debit card is one's routine, everyday expenses like putting gas in the car, running to the grocery store, or dining out. Since you are spending money you already own, it becomes simple not to overspend beyond the reach of your budgeting capacity. Besides, it is perfect for withdrawing cash from an ATM with no cash advance fees.

Credit Card

Credit cards are very useful when you have more significant purchases that you might need to finance over some time. They, however, get more usage with online transactions and travel bookings because their fraud protection and abilities to resolve disputes are better. Moreover, if you are looking to build or improve your credit score, using a credit card responsibly will help you toward that. Also, you can derive massive time savings with credit card rewards, especially if you pay your balance in full every month.

Role of Forex Exchange Providers

As a matter of fact, when you are traveling abroad, credit cards often have a more advantageous exchange rate compared to what you would obtain at a currency-exchange provider. However, it is only the forex providers that allow you the provision for getting foreign currency in advance for your trip and having cash with you for spending at the places where cards are not accepted.

Pros and Cons of each Card

You have direct access to your own money through a debit card so it is quite convenient for everyday use. This makes them ideal for budgeting and keeping one's self in financial control without the risk of running up unsecured debt and having to pay off credit. Yet debit cards have their downside: they provide very little consumer protection and none of the credit-building advantages a credit card affords. Typically, they offer fewer rewards and perks than credit cards, which could be considered a con by some.

On the other hand, credit cards have some principal advantages in the capacity for credit building. You will be improving your credit score with consistent usage and timely payment, which is pivotal in future financial activities such as taking loans or mortgages. Credit cards also benefit from a high level of consumer protection and fraud resolution services, making cardholders feel safe. Moreover, most credit cards do have huge rewards and benefits in terms of cashback, travel points, and other exclusive discounts which make them very alluring if one has the sense to handle them properly

These benefits notwithstanding, credit cards are not free from probable risks. They could plunge one into debt, running interest charges when ill-used, and the cost of such can be a sort of financial suicide. Accumulation of late fees or over-the-limit fees may also increase; therefore, care has to be exercised in using them. More than this, poor management of credit cards will result in a low credit score—needless to say, using your credit cards wisely. 

In fact, as per RBI, fraudsters siphoned off ₹615.39 crore in more than 1.17 lakh cases of credit and debit card frauds over 10 years from April 2009 to September 2019 so none of them are as safe as they appears to be due to lack of digital awareness among citizens.

Although both debit and credit cards have their pros and cons, the former is much better for budget-oriented people who like to stay out of debt, even if the perks and consumer protection options are fewer. For their part, credit cards bring enormous benefits in terms of building credit and rewards; however, they require careful management to avoid debt and a bad credit score. This all comes down to personal financial habits and goals.

Conclusion

The choice between the use of a credit card and that of a debit card is, in essence, a question of your financial habits and goals. If you are more into living within your budget and protecting yourself from falling into the trap of debts, a debit card might be your best friend. If you're building a credit score, wanting to earn rewards, or have other offers of protection, a credit card is more aligned with this. Often, having both a credit and a debit card provides flexibility and an array of benefits which suit different scenarios.

The difference between credit and debit cards is an awareness that guides good financial decisions. The advantages differ from one another, and their disadvantages may at times be critical, depending on how and when one uses them. Knowing the benefit of each card can be very helpful in optimizing financial management to their benefits.

As a forex exchange provider, we strongly advise the simultaneous use of credit and debit cards to obtain maximum financial flexibility and safety for traveling abroad. Our services are designed to help you navigate complex foreign exchange so that you get the best rates and support for all your currency needs. Call us today to discuss further how we can help you with your Forex needs and make your financial transactions seamless and efficient.

Sources:

Hindustan Times. https://www.hindustantimes.com/mumbai-news/615-39cr-lost-to-debit-credit-card-frauds/story-E335UM0fj1dVKJYZcJ2zRN.h