Are you confused between a debit and a credit card? Although they look identical, their uses and features like reward points, EMI option and impact on credit score are distinctly different. Read on to know more about these differences.
Debit Card:
A debit card is directly linked to your savings account and can be used to make purchases. As long as there are funds in your bank account, you can use the card. The different types of debit cards are:
- Standard Debit Card:The money is directly withdrawn from your bank account.
- Prepaid Debit Card: It can be used to make purchases up to the amount pre-loaded on the card. It allows you to withdraw money without access to a bank account.
- Electronic Benefits Transfer (EBT): This card is issued by federal & state agencies to allow specific users to use some benefits to make purchases. Common benefits provided are food stamps and cash benefits.
Credit Card:
Credit cards are issued by financial institutions, typically a bank. The credit card holder is assigned a pre-determined credit limit to use money as a short-term loan by the credit card issuing company. When you apply for a credit card, you agree to pay the money back on a certain date according to the institution’s terms. There are four major types of credit cards:
- Standard Card: This a simple type of credit card offered by the bank.
- Secured Credit Card: It requires an initial security deposit to be placed on the card. The deposit you pay here is equal to the transaction limit of the card.
- Reward Card: It offers travel points, cash back, and other benefits.
- Charge Card: This card doesn’t have a preset spending limit, but the complete balance amount must be paid at the end of each month.
Major Differences Between Credit & Debit Cards:
The only similarities between credit and debit cards are they are almost identical in appearance. Both have 16-digit card numbers, an expiration date, and CVV codes. But, the objective and usage of both cards are different. Let’s look at the differences between them.
1) Impact on Credit Score:
A credit card affects your credit score in 3 ways
- Builds your credit history
- Displays your repayment intent
- Shows your credit behaviour
Building a credit history is a hidden benefit of using a credit card. Credit history is an important factor in your credit report and score. The simple logic is if you don’t have a history, how can you have a score? There are simply no parameters to judge you. Debit cards, since they rely on the amount actually in your account, do not count towards credit. So, using a credit card is a good way to build your credit history provided it is managed well. A well-managed credit card has a good payment history. This means that you don’t default on any of the monthly payments.
And, last but not least is your credit behaviour. Do you constantly maximise your credit limit? Is your credit utilisation ratio very high? This ratio is the percentage of actual credit usage out of your total limit. E.g, if your limit is Rs.1 lakh and you regularly use Rs. 80 k, your credit utilisation ratio is 80%. This shows a credit hungry behaviour, also viewed negatively.Such factors lower your credit score, create a negative impression in the eyes of lenders, and subsequently, such consumers will struggle to get a loan approval.
Related read How To Find Your CRIF Credit Score An Infographic
2) EMI Option:
In debit cards, there is no concept of EMI because the entire amount is directly debited from your savings account. However, a few e-commerce sites and some banks are offering a debit EMI option, wherein you need to maintain a fixed/recurring deposit to avail this facility. When you purchase, your money is first debited from your bank account and subsequently reversed in two working days. This means you need to maintain the necessary balance at the time of the initial purchase. The debit card EMI starts after 30 days from the date of reversal.
Credit cards give you the facility to convert your purchases into EMI. But, you have to pay interest every month on the outstanding amount until your EMI is fully paid. You might also have to pay service tax and other additional charges. You may have an idea of using multiple credit cards to fund different purchases and increasing your total credit limit. But, before you hit apply, wait! Multiple credit cards, with high utilisation, will negatively affect your credit score. When you apply for a loan, banks check your credit history of each credit card you use.
3) Protection on Purchase:
Both debit and credit cards have a PIN; hence, they are secured. A majority of credit cards have a liability protection feature, which makes them safe & secure from any unrecognized transactions or frauds. In addition, many banks provide a charge back feature, wherein an unauthorised transaction on a credit card is paid back to the cardholder. These features are not offered on debit cards. If you want such security, you can apply for the Card Protection Plan (CPP) and secure your debit card from any fraud or misuse. Unlike debit cards, credit cards offer cashback and rewards such as fuel points, air miles, and free gifts?.
Conclusion:
Credit cards can come with huge financial benefits if used wisely. They build your credit score and ease loan approval to fulfill your financial goals. But, before you swipe your next credit card, check your CRIF credit score here and monitor it regularly.
