Credit cards vs Debit cards what you are going to vote for?
Sometimes people especially new banking users get confused while selecting payment mode whether they should use a Debit card or credit card to make payments.
Choosing between a credit card and a debit card can be tricky when you are strictly managing your money. Both have their benefits and drawbacks.
As a user, I know the advantages and disadvantages of both cards.
However, I have worked for 17 years with credit cards and I know the amazing benefits of utilising them.
Still, some people prefer to use and pay through debit cards so in this post, we’ll explore the differences between credit cards and debit cards, and help you decide when to use each.
Credit Cards vs Debit Cards: The Best option
What is a Credit Card?
A credit card is a payment card that allows you to borrow money from the card issuer to make purchases.
You agree to pay back the money, often with interest, at a later date. Credit cards come with a credit limit, which is the maximum amount you can borrow at any given time.
Benefits of Using a Credit Card
Builds Credit Score: Using a credit card responsibly helps you build a good credit score, which is essential for getting loans and better interest rates in the future.
Rewards and Cashback: Many credit cards offer rewards points, cashback, or miles for every purchase, which can save you money or earn you perks.
Purchase Protection: Credit cards often provide purchase protection, such as extended warranties or insurance on items bought with the card.
Emergency Funds: Credit cards can be useful in emergencies when you need funds but don’t have enough in your bank account.
Travel Benefits: Some special travel credit cards offer travel-related benefits like free hotel stays, travel points, miles, or lounge access. This can be especially valuable for frequent travellers.
Disadvantages of Using a Credit Card
Interest Charges: If you don’t pay your credit card bill in full each month, you could be charged high interest rates on the remaining balance.
Interest on credit cards can be the highest on the list. As the credit card interest can go up to 72%, in normal cases you will find the APR between 36% to 42%.
Debt Risk: It’s easy to overspend with a credit card, which can lead to debt if not managed carefully. Credit cards allow you to buy everything on credit and this leads some users in big trouble.
Sometimes people spend more than their income and increase liability.
Fees: Credit cards may come with costs, such as annual fees, late payment fees, or foreign transaction fees. Cash withdrawal through a credit card can be a big dent in your savings.
Sometimes you can be charged for services like Rent payment and education fee payments via credit cards.
What is a Debit Card?
A debit card is linked directly to your bank account. When you use a debit card, the money is immediately deducted from your account.
You can only spend what you have in your account, making it a great tool for budgeting.
Benefits of Using a Debit Card
No Debt Risk: Since you can only spend what you have, there’s no risk of falling into debt with a debit card.
No Interest Charges: Debit cards don’t charge interest because you’re not borrowing money.
Easy Access to Cash: Debit cards are great for withdrawing cash from ATMs.
Helps with Budgeting: Debit cards help you stick to your budget since you can only spend the money you have.
Disadvantages of Using a Debit Card
No Credit Building: Debit card usage does not impact your credit score, so it won’t help in building your credit history.
Limited Rewards: Debit cards usually don’t offer rewards or cashback like credit cards do.
Less Purchase Protection: Debit cards often offer less protection for purchases compared to credit cards. However, some higher variant accounts offer a debit card with purchase protection and insurance benefits.
When to Use a Credit Card
Building Credit: If you want to build or improve your credit score, using a credit card responsibly is a good option.
Big Purchases: Use a credit card for large purchases to take advantage of purchase protection and extended warranties.
Earning Rewards: If you want to earn rewards or cashback on your spending, a credit card is the way to go.
When to Use a Debit Card
Everyday Spending: For everyday purchases like groceries or small expenses, a debit card is a safe choice.
Sticking to a Budget: If you want to avoid overspending, using a debit card ensures you only spend what you have.
Withdrawing Cash: If you need cash, a debit card is the best option as it allows you to withdraw money directly from your bank account without any fees.
Conclusion
Choosing between a credit card and a debit card depends on your financial goals and spending habits.
Credit cards are great for building credit and earning rewards, but they require careful management to avoid debt.
Debit cards, on the other hand, are perfect for everyday spending and sticking to a budget. By understanding the benefits and drawbacks of each, you can make the best choice for your financial situation.
Hope now you know the difference between Credit Cards vs Debit Cards and have a clear hint of which card you should use in which situation.
FAQs
1. Can using a credit card help build my credit score?
Yes, using a credit card responsibly, like paying your bill on time, can help improve your credit score.
2. Do debit cards charge interest?
No, debit cards do not charge interest since you’re spending your own money, not borrowing.
3. Is it safer to use a credit card or debit card for online purchases?
Credit cards often offer better fraud protection for online purchases compared to debit cards.
4. Can I earn rewards with a debit card?
Most debit cards don’t offer rewards, only a few with higher variants come with an annual fee and offer reward points. On the other hand Credit cards typically offer rewards like cashback or points.
5. What happens if I spend more than I have with a debit card?
If you spend more than your balance, your transaction may be declined, or you might incur an overdraft fee.
6. Should I use a credit card for big purchases?
Yes, using a credit card for big purchases can be beneficial due to purchase protection and potential rewards.
7. Can I withdraw cash with a credit card?
Yes, but it’s usually costly due to cash advance fees and higher interest rates.
8. Is it possible to overspend with a debit card?
No, you can only spend what you have in your account, so there’s no risk of overspending.
9. What should I do if I lose my debit or credit card?
Immediately report the loss to your bank or card issuer to prevent unauthorized transactions.
10. Can I have both a credit card and a debit card?
Yes, many people use both to take advantage of the benefits each offers.
Well explained Jitender. The main problem is our education system does not tell us about Income, expenses, Credit and debt. Many youngsters get into the debt trap of credit cards due to the easy buy and pay later scheme. Because they don’t know about the income vs expenses or the DTI.
That is true, but parents can teach these things to their children as they already know the consequences. Simple finance, like the benefits of saving money, living on a budget, not buying unnecessary things to show off and compete with others, etc. These simple steps can help them to understand money management for a better future.