Credit and Debit Cards are popularly used financial instruments. Both have unique features and intended uses. Recognising these distinctions is important for making sound financial choices and managing your money effectively. So, let us delve into the disparities between the two.
Source of funds
- Credit Cards
When you use a Credit Card, you borrow money from the card issuer up to a predefined credit limit. You need to repay the borrowed amount by the due date to avoid interest charges.
- Debit Cards
Debit Cards are directly linked to your Bank Account. When you purchase something using a Debit Card, the funds are immediately withdrawn from the Bank Account.
Credit limit vs. account balance
- Credit Cards
Credit Cards have a fixed credit limit (the maximum amount you can borrow). This limit is decided and set by the card issuer based on your credit history, income, and other financial factors.
- Debit Cards
Debit Cards are not subject to any credit limit. Instead, they are directly tied to the available balance in your Bank Account. Your spending is limited to the funds you have in the account.
Building credit history
- Credit Cards
Responsible Credit Card use, such as making timely payments and managing credit balances, can positively impact your credit score. A good credit score is important if you want to secure Loans and enjoy favourable interest rates.
- Debit Cards
Debit Card transactions do not contribute to your credit history or affect your credit score. They are simply a direct means of accessing your funds.
Interest charges
- Credit Cards
If you maintain an outstanding balance on your Credit Card beyond the grace period, which is the period between the end of the billing cycle and the due date, you accrue interest charges on the remaining amount.
- Debit Cards
Since Debit Card transactions are directly linked to your account balance, you do not incur interest charges. However, if your account balance is insufficient, be mindful of potential overdraft fees.
Protection
- Credit Cards
Credit Card often provides strong fraud protection. Many issuers offer zero-liability policies for unauthorised transactions.
- Debit Cards
Debit Cards also have fraud protection. However, the liability limit is higher and depends on how quickly you report the unauthorised transactions.
Rewards perks
- Credit Cards
A Credit Card gives you access to rewards programmes, cash back, travel perks, and other incentives. The benefits vary depending on the Credit Card you choose.
- Debit Cards
Debit Cards do not offer as many rewards or perks. While some Debit Cards may have cashback programmes, their validity depends on a bunch of factors. Credit Cards, however, often provide a host of offers and rewards if you use the card responsibly.
Conclusion
Understanding the key differences between Credit and Debit Cards helps you choose the right tool for various financial situations. Selecting a card that satisfies your goals further guides you in devising a sound financial strategy.