Difference Between Credit Card and Debit Card

Credit card and debit card are the two main types of payment cards. Both of these are used for transaction purposes but they differ in the type of money that they offer. Let us understand these two cards in more detail throughout this article. You will learn the difference between credit card and debit card.

Table of Contents

1. Difference between credit card and debit card
2. Credit Card
3. Debit Card
4. Choosing Between a debit card and credit card

Credit Card

It is a payment card through which you can make a certain amount of payment. After a fixed time period, you will have to repay this amount to the financial institution. Broadly, there are two types of credit cards: business and consumer credit cards.  

Financial institutions issue credit cards to those who have the financial capability to repay credit card loans. These institutions check your credit score before issuing the card. Some external agencies may also perform the check on the behalf of a financial institution. 

Through credit cards, people can borrow money from issuing bank up to a certain limit to make purchases or withdraw cash. They are a form of unsecured loan, where the borrowed amount must be repaid, typically on a monthly basis.

Responsible use of a credit card can help build your credit score, as it demonstrates your ability to manage debt. However, failing to pay off your balance can lead to interest charges and negatively affect your credit rating. Credit cards offer benefits like rewards, cashback, and protection on purchases, making them a preferred choice for many consumers.

The following is visible on the front of a credit card:

Logo of the financial institution that has issued the card

1. Emv chip safeguards the cards against fraud
2. The hologram on the card validates that the card is legal and secure for processing payments
3. Card number as the identification code
4. Card type logo is the payment network’s logo such as Visa or Mastercard
5. Expiry date reflects the date when the card will no longer be functional
6. At the bottom, it mentions the cardholder’s name
7. Contactless chips for contactless cards

On the backside, credit card displays:

1. Magnetic Strip to store the code data of the card
2. Signature strip to confirm the legal contract between the cardholder and the bank
3. CVV that is used for completing online transactions

Types of Credit Card

Business Cards: These are issued to registered businesses and are used for official purposes. These cards offer special rewards related to office supplies, shipping, travelling and business technology. Financial institutions check the personal credit score of the applicant before issuing the business credit card.

Secured Cards: These are the cards that are secured through a deposit account that the cardholder owns. To get such cards, the cardholder must deposit equal or double the total amount of required credit. In case, the cardholder defaults on a payment, the card issuer can recover this amount from the deposit.  

Debit Card 

A debit card is a plastic card that is linked directly to your bank account. This means that you can make payments or withdraw your own money through this card. Once you do the transaction through your debit card, your bank account will be debited for the amount. It is issued by the bank to account holders for their convenience. You will not need to visit the bank for transactions or for withdrawing money. 

Debit cards, on the other hand, are linked directly to your bank account. When you make a transaction with a debit card, the money is immediately deducted from your account. Debit cards do not have the facility to borrow money and therefore do not directly influence your credit score. They are considered safer by some, as spending is limited to what you have in your account, reducing the risk of debt accumulation. Debit cards are ideal for everyday purchases and help in keeping your spending in check.

Components 

A debit card displays the following at its front:

 Logo of the bank that has issued the card

1. Emv chip that stores data required for processing transactions
2. Hologram to validate that the card is legal and secure for processing payments
3. Card number as the identification code
4. Logo of the card is the payment network’s logo such as Visa or Mastercard
5. Expiry date reflects the date when the card will no longer be functional
6. At the bottom, it mentions the cardholder’s name

The back of the debit card displays:

1. Magnetic Strip for storing the card’s code data
2. The signature strip shows the legal contract between the cardholder and the bank
3. CVV  is mandatory for completing online transactions

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Types of Debit Card

The following are the different types of debit cards:

Visa Card

These are the most accepted debit cards across the globe. Banks that have tie-ups with the international Visa Payment System network issue these cards. Online transactions in case Visa debit cards take place through a secure Visa payment platform.

Different types of Visa cards include Visa Classic Debit Card, Visa Gold Debit Card, Visa Platinum Debit Card, Visa Signature Debit Card and Visa Infinite Debit Card.

MasterCard Cards 

These are issued by an American financial service corporation called MasterCard Worldwide. It is popular among customers for its benefits, rewards system and satisfactory customer care services. It allows cash convenience with secure access to funds across the globe.

Indian customers can directly contact the card-issuing bank for any security or service issue related to the card. The three types of MasterCard include Smart MasterCard, World MasterCard and World Elite MasterCard.

RuPay Cards

These were introduced in India and are accepted domestically. These were issued under the domestic debit card scheme by the NPCI. You can perform domestic transactions, online purchases and utility bill payments. 

These have low transaction costs and easy availability. This makes the RuPay debit cards popular in rural areas. It is a great alternative to MasterCard and Visa cards. All major public and private sector banks issue RuPay cards.

Visa Electron Cards

These cards do not provide an overdraft facility to the cardholder. These debit cards restrict cardholders from overspending. Prepaid debit cards give people without access to a bank account a way to make electronic purchases up to the amount that was preloaded onto the card.

No interest is levied when you withdraw cash at an ATM using Visa electron debit cards. You cannot make offline payments in flight and train through this type of debit card. Most Indian banks issue these cards.

Maestro Cards

These cards are similar to MasterCard. You can use these cards for withdrawing cash from anywhere, You can make online purchases and transactions at PoS outlets through this card. MasterCard has offered this card since 1991. As per the official statement, these cards will phase out across Europe from 1st July 2023.

When to Use Debit Card and Credit Card?

Debit Card

A debit card is like using digital cash. Money comes directly from your bank account while buying something. It's good because you can only spend what you have. This means no overspending or getting into debt.

When to use it:

• For daily buys, like food or movie tickets.
• When you want to make sure you're spending money you already have.

Credit Card

A credit card lets you borrow money. You can spend up to a set limit and pay back later. If you don't pay it all back at once, you'll owe more (that's interest). But, using it right and paying on time helps you build a good credit score. This score is key for big buys in the future, like a car or house.

When to use it:

• For big purchases when you don't have all the money right now.
• For online shopping, since it often offers better fraud protection.
• To build a good credit history, but only if you can pay it back on time.

Choosing Between a Debit Card and Credit Card

• Pick a debit card to keep things simple and avoid spending more than you have.
• Go for a credit card for bigger buys or to help your credit score, but be careful with how much you spend.

Conclusion

Choosing between credit card and debit card depends on your financial habits, goals, and discipline in managing money. If you aim to build a credit history or enjoy the perks that come with credit cards, they might be the right choice for you. On the other hand, if you prefer to avoid potential debt and manage your finances strictly based on what you own, a debit card could be more suitable.

In conclusion, both credit and debit cards are essential financial instruments offering distinct advantages and transaction options. Understanding how they can affect your credit score helps in making informed decisions aligned with your financial strategy.