Money Matters - Simplified

The Debit Card vs Credit Card

Which one should i use, my debit card or credit card? Which is the difference between the two? MT inquires into questions like these.
Which should I use, my debit card or credit card. Is there any difference between the two?

Although, there are many alternatives to cash like the credit and the debit cards, the common man is yet to understand the nitty-gritty involved in their usage.

Co-branded Cards

1 Co-branded cards are an interesting way of deriving the most from your credit cards.

2 The co-branded cards carry the name of a third party, which may be a retail outlet, airlines and so on. Such cards will have benefits whenever you purchase products from the third party. They may also be co-branded with a charity that will receive a fraction of every payment you make with the card.

3 Co-branded cards are more likely to carry significant fees. Make sure that the benefits they provide outweigh the costs.

4 Read the fine print and ask questions when it comes to benefits. The descriptions provided are often rather vague and you need to clarify the details to make sure that the benefits you get are worth the annual costs.

5 The usual warnings about credit cards apply to these cards as well. So, avoid getting caught in the debt trap by using them wisely.

While the debit and the credit cards might take similar appearances, both these instruments are differ in the way they operate and the kind of services they render.

Let’s try to understand the differences between these two types of cards, which are rapidly replacing cash in modern times.

Understanding Your Debit Card The modern day debit card is just another simplified way of accessing your bank account from anywhere, anytime. It is alternatively referred to as your ATM card, primarily because it enables you to carry out transactions or withdrawing money and several other functions through an ATM, or the Automatic Tailoring Machine. Such a card can also be used to carry out purchases. When you pay for your purchases by using your debit card, it means that you have allowed the vendor to electronically transfer a certain amount of cash from your personal bank account to his account. You thus end up paying for your purchases without involving any visible cash.

Understanding the Working of a Credit Card A credit card on the other hand is an instrument that enables you to borrow money for paying for your purchases. What this means is, when you decide to use a credit card to pay for your purchases, you are in fact using a borrowed amount other than that available in your personal bank account. It is thus similar to borrowing cash from someone and using it to buy what you need. The credit card company will send you a statement at the end of the month, listing all the purchases that you have made during the said time period. You can settle this bill either in full or in part. Paying in part will entail a certain interest chargeable for the amount due.

Strategic Comparison of the Two Here are the basic points of differences between the two instruments of payment

Source of Payments While debit cards entail payments made directly from your bank account, payments in case of credit cards are made by borrowing money other than what you have in your bank account Payment Limit You cannot make payment for more than the balance available on your account in case of debit cards. While, in case of credit cards, you can spend as much as you want provided, you do not cross the limit specified by the card. It thus enables you spend more even when finances are scarce.

Identification Proof You do not require any sort of identification except your ATM pin in case of credit cards, while a sample signature is required for identification, in case of credit cards.

Repayment No repayment is necessary for purchases made on debit cards while, the same is not true in case of credit cards.

Charge Debit card transactions do not involve any charge, while credit card transactions do, and the rate of interest chargeable on the amount not repaid on time is exorbitantly high.

Protection Against Fraud Debit card transaction receipts must be maintained meticulously to avoid from being overcharged or charged for insufficient funds. The credit cards are protected by The Electronic Fund Transfer Act, which entitles you to complain against any error in your card statement and also enables you to hold payments until the dispute is settled.

Impact on Credit Score For obvious reasons, your debit card has no bearing on your credit score, but if you can use your credit card responsibly and wisely it has a positive impact on your credit score and thus your credit worthiness.

Rewards and Perks Payments made through debit cards do not entitle you to avail any special perks or privileges. While those made through credit cards can earn you airline miles, cash rebates and other rewards. Guarded with the knowledge of the differences between the two, you are now ready to make the most of both these instruments.