Many people probably have at least one debit card and one credit card in their wallet. But do you know what the differences are and how they affect your pocket? Do you use both interchangeably? The conveniences they offer are unbeatable in many instances, but they have important differences that could substantially affect your bank balance. Read on to know the differences between a credit card and a debit card and which of the one is better for you.

How Do Credit Cards Work?

Many of you may be users of credit card, while there may be many who are contemplating of applying for a credit card. No matter which side you belong to, it is important that you understand the working of a credit card well so that you do not make mistakes while using it.

The process of credit card application and usage is encapsulated in the steps below:

  • Application for a credit card

  • Approval by the credit card issuer/ bank based on your credit score, income, and other existing borrowings

  • Card issued with a set credit limit

  • Monthly usage of the card by you for payments online and offline

  • An outstanding bill is received at the end of the billing cycle with a due date

  • By due date, all amount has to paid, failing which an interest ranging between 24-48%*

Additional Reading: How does interest on your credit card work?

A credit card does not mean that you have more money; it is only a deferred payment for the purchases you have made. Every time you make a purchase on your credit card, you are in fact borrowing that money from the credit card issuer until you pay it back at the end of the month.

If you pay your credit bills on time and in full on a monthly basis without fail, you need not pay any interest on the money spent on your purchases and are using the bank’s money ‘for free’, while your money earns interest elsewhere. The credit card company allows you to use their money that month 'for free' if you repay them in time at the end of the monthly billing cycle.

However, if you make only a partial payment, the issuer will charge interest on the remaining outstanding amount—or balance—that will be carried over to the next month's bill. In addition, you’re your future payments through the card will also be charged interest.

Another effect which is worth mentioning here is that each delayed or missed payment will bear an impact on your credit score. Here, one must be careful while spending on a credit card since there is a strong risk of being unable to pay for your purchases on time and getting into a credit debt spiral.

Additional Reading: How do credit cards impact your credit score?

How do Debit Cards Work?

A debit card is similar to a credit card where you make purchases using the plastic card, but unlike a credit card, the money is directly debited from your bank savings account. You can only use the money you have available in your account. If you do not have enough money in your account, your transaction will not be approved, which is why you cannot get into debt with a debit card.

Debit cards are generally issued when you open a savings account with a bank. There is no set limit here as the amount is directly debited from your account. Even though there is no element of interest involved in usage of a debit card, yet it is better to spend cautiously and prudently, as excessive use of your card can result in emptying out your entire account balance.

Difference Between A Debit Card and A Credit Card

With a credit card purchase, the transactions are done using the bank’s money ‘on loan’. If the bills are not paid in full and on time, you will be subject to interest charges that can rapidly accumulate month after month and can leave you in debt.

A debit card, on the other hand, will not allow you to fall into debt since all charges are directly debited from your bank account.

Debit Card 

Credit Card 

 Need to have a savings account with the bank 

 No need to have a savings account with the bank 

 Amount is debited from your savings account 

 You use bank’s money as a loan, which you need to repay during the bill cycle 

 You can only use the money available in your account 

 You can only use the money up to your credit limit 

 You can’t go into debt 

 You can go into debt if you fail to repay the amount you borrowed as credit 

 

Which of the two is better for you?

A straight forward answer may not be right here.

If you are able to manage your payments promptly and spend on your credit card well within your credit utilization limit, then credit cards may be the right choice for you. In addition, you can also get points and rewards on credit card utilization. By paying off promptly at the end of the billing cycle you can enjoy convenience and also push through shorter periods of credit crunch with the aid of your card.

On the other hand, if you are a person who struggles to keep up with debt repayments and paying other bills on time, a credit card may be a bad choice for you. For if you do not repay the outstanding amount promptly, then getting into the debt spiral may be very detrimental for your financial health and credit score.

To begin with, you may also try using Prepaid Credit Cards or Credit Cards against Fixed Deposit and once you form a habit of prompt repayment you may move to a regular credit card.

It is for you to make the choice in the end, but whatever be the choice, spend only as much as you can afford.

* Look at the terms and conditions of your credit card to know the interest being charged on your credit card