To make a good financial decision, it is important to know the basic differences between the financial tools. To take a simple decision regarding these instruments, the differences between them can prove helpful. Two such financial instruments are Credit cards and Debit cards. Both of them are accepted at same places. Debit cards can be used just like the way credit cards are used. Both of the instruments represent convenience.
What’s the difference?
- Meaning: Debit cards offer credit but don’t work like the credit cards. Debit cards draw the money directly from the account when the holder makes the purchase. The transaction happens with the dropping off the amount by the bank to the merchant. It is important that the cardholder keeps checking the balance of their account. A debit card cannot be used without a PIN. A credit card allows the card holder to borrow money in small amounts. A credit card can be used for basic transactions. And on purchases with the credit card, the credit card company charges an interest upon the purchases. Thus, as the name goes, credit card offers credit and interest paid by the holder is the cost associated with it.
- Connected: Debit cards are connected to the checking/savings account. While, the credit cards need not be connected to any checking account.
- Bills: There are no monthly bills issued for debit cards. Credit card holders receive monthly bills according to the purchases made.
- The process of application: For issuing a debit card, the process of application is easy and without any barrier. But for issuing the credit card, the applicant’s credit score and other details are obtained. This makes credit card’s process of application little bit difficult.
- Spending limit: The spending limit for a debit card is the total balance of the connected account. The spending limit for a credit card holder is set by the credit issuer. With changes in the credit card holder’s credit worthiness, his spending limit increases or stays the same.
- Interest: There is no interest charged on the debit card holder as no money is borrowed. The interest upon the credit card holder is usually high. The holder has to pay interest on the outstanding balance of the credit bill paid.
- Security issues: to secure a debit card, a PIN is used. A PIN keeps the Debit card secured even if the card is stolen. But with PIN, the card is also stolen, the debit card becomes insecure. Credit cards are not secure as many customers still use the dated card security technology. Both of the cards should be kept safe.
- Fraud liability: there are high chances of not identifying the guilty behind the fraud in the case of debit cards. If someone makes purchases, the money gets directly removed from the bank account and investigating that damage would take a long time and longer the investigation takes, it becomes more difficult to find the guilty. But for credit cards, rarely is anyone held liable as the purchaser is the one liable for the amount.
- Credit history: Debit cards do not affect the credit history while if the payments are not paid for the credit cards, it would affect the creditworthiness of the cardholder.
- Overdraw fees: if the debit card holder overdraws, then he will have to pay high overdraw fees. But for some credit card companies, overdraw is not a big issue.