The two cards frequently used for purchasing goods and services are Credit Cards and Debit Cards. Although both are practically the same, there are significant differences between Credit Cards and Debit Cards.
Debit Cards use the money you already have in your account, but Credit Cards let you borrow money from a lender. Simply put, you can pay immediately with a Debit Card, while you can pay later with a Credit Card. This post will discuss the distinctions between these two cards and how they operate.
Credit Cards: What are they?
A Credit Card is a type of payment card allowing its owner to borrow money from the issuing bank to pay for products and services. The cardholder can spend up to a predetermined credit limit set by the issuing bank based on the cardholder’s creditworthiness. The cardholder can repay the borrowed amount at a later date, usually with interest.
How does a Credit Card work?
When you use your Credit Card to make a purchase, the issuing bank pays the merchant on your behalf. The bank will subsequently send you a monthly statement outlining your transactions and outstanding balances. This statement also shows the needed minimum payment amount to avoid late penalties and interest charges.
If you pay the entire amount within the due date mentioned on the statement, you will not be charged any interest. However, if you carry forward the balance, you will be charged interest on the outstanding amount.
Debit Cards: What are they?
A Debit Card allows you to spend money already in your account because it is connected to your bank account. You cannot borrow money like you can with a Credit Card because you can only spend up to the amount you saved or deposited in your account.
How does a Debit Card work?
When you use a Debit Card to make a transaction, the money is immediately debited from your account. You will receive an SMS or email alerting you of the transaction, and the transaction information can even be found in your bank statement. Debit Cards are a good alternative for those who want to avoid taking out loans or overspending in the long run.
Significant Differences between Credit Cards and Debit Cards
The major distinction between Credit and Debit Cards is that Credit Cards allow you to borrow money, but Debit Cards only allow you to spend money you already have. Here are some more significant differences:
- Credit Cards carry interest on unpaid balances, but Debit Cards do not.
- Debit Cards do not have a credit limit, whereas Credit Cards do.
Common Misconceptions about Credit Cards and Debit Cards
Credit and Debit Cards are popular payment methods, but there are various myths about them. Here are some common Credit Card and Debit Card misconceptions to be aware of:
- Credit Cards are free money – One of the most significant misconceptions about them is that they offer free money. Many people believe they can use their Credit Cards to make purchases without worrying about repaying the amount. However, these cards are essentially based on a loan system, and you will have to repay the amount along with interest as same as repaying the loan.
To calculate your Credit Card Equated Monthly Instalments (EMI), use a Credit Card EMI or Credit Card Loan calculator. It will also help you calculate the monthly repayment schedule for your Credit Card EMis.
- Debit Cards are not secure – Many people believe that Debit Cards are not secure and that their money is at risk of being stolen. However, these cards are just as secure as Credit Cards. They use various security measures like PINs, CVVs and OTPs to keep your transactions safe.
- Credit Cards are only for wealthy people – Some people believe Credit Cards are only for the rich. However, anyone can apply for this card, and the credit limit depends upon their credit score or the transaction done by the user.
- Debit Cards have no fees – While it’s true that Debit Cards do not charge interest like Credit Cards, they may have other fees such as annual, withdrawal, and transaction fees.
- Closing Credit Card Accounts improves your credit score – Many people think closing their Credit Card Accounts will improve their credit score. This isn’t always the case, though. It can lower your overall credit limit and impact your credit utilization ratio. Closing Credit Card Accounts can actually lower your credit score in the long run.
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Conclusion
Both Credit and Debit Cards are convenient payment methods, but they operate in distinct ways. There are some differences between Credit Cards and Debit Cards, as mentioned in the above passages.
Credit Cards allow you to borrow money, whereas Debit Cards only allow you to spend what you already have. To avoid debt, it is critical to utilise Credit Cards wisely. Similarly, while using a Debit Card, it is essential to maintain track of your expenditures to avoid overspending.