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Credit Vs Debit Cards Differences Benefits

Difference Between Credit Card and Debit Card: Key Features and Uses

Debit and credit cards are two of the most commonly used financial tools, but they have different purposes and should be used differently by the owner. They significantly impact your spending, budgeting, and credit score while helping you purchase goods, access large amounts of funds, and build healthy financial habits. Understanding the differences between these cards will help you manage your finances better and take advantage of the various benefits of each card. This blog will help you know the multiple pros and cons of these cards and how debit cards are distinct from credit cards.

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Table of Content

1. What Is a Credit Card and How Does It Work?

2. Pros and Cons of Using Credit Cards

3. What Is a Debit Card and How Does It Work?

4. Pros and Cons of Using A Debit Card

5. How Is A Credit Card Different From A Debit Card?

6. When To Use Credit Card Over Your Debit Card and Vica Versa

6.1 When To Use Credit Cards

6.2 When To Use Debit Cards

Written By

Utsah Sharma

Utsah Sharma is a seasoned financial expert with a Master’s Degree in Commerce specialising in Financial Services, Investments, Loan Assessments, Mutual Funds, Banking & Loan products. Drawing on her experience, she has established herself as a trusted voice, providing invaluable insights and guidance to seasoned investors and beginners. She is committed to breaking down the complexities of everything finance.

Reviewed By

Piyush Bothra

Chief Financial Officer, Square Yards

Piyush Bothra is the Chief Financial Officer at Square Yards, bringing over two decades of rich experience in finance and leadership. He is an MBA graduate from the prestigious IIM Lucknow and holds a BE in Information Technology from Sardar Vallabhbhai Patel Institute of Technology. He has played pivotal roles in scaling businesses and driving financial strategies. At Square Yards since 2015, Piyush is known for his strategic vision, strong financial knowledge, and valuable financial insights, significantly contributing to the company's growth and success.

What Is a Credit Card and How Does It Work?

A credit card is much more than a rectangular plastic card issued by a bank. These small financial tools enable the cardholder to purchase any good and service under a set limit on small-term loans from the bank. This feature means that the bank pays for your purchase, and you pay the overall amount back to the lender, along with some additional interest, on the selected billing date. Some credit cards also offer the feature of a cash line of credit, allowing them to borrow money in the form of cash via any bank teller or ATM Machines.

Multiple companies support payments using credit cards, and some even offer additional discounts on them. Credit Cards charge a much higher APR than other forms of loans, and bills must be paid on the deadline date. Otherwise, the debt will be forwarded to the next month, and you might face difficulty paying for the current month’s expenses.

Banks often don’t charge an annual fee on credit cards and instead allow a certain amount of cashback on each purchase.

Pros and Cons of Using Credit Cards

Here are the official pros and cons of using a credit card, which will help you decide whether or not you want to apply for the same from a reputed banking institution:

Benefits	Drawbacks
People can enjoy the use of credit anywhere, anytime and do not have to worry about reducing their bank balances.	Credit cards often come with hidden costs, including late payment, joining, renewal, and processing fees. Missing payments can lead to penalties and lower credit scores.
Regular credit card payments can help you build a good credit history, which will prove beneficial while applying for a loan or scheme.	Credit cards offer the irresistible convenience of spending money anytime and anywhere, which can lead to spending more money that can afford to repay.
You can avoid taking out personal loans for large purchases and instead pay off your credit card debt in instalments, saving you the trouble of long applications and approval processes.	If you fail to pay off your credit card balance by the due date, the remaining amount is carried over, with interest charges applied, which can become a huge financial strain.
Many businesses offer special cashback and reward points to purchasers using credit cards, which can be redeemed while paying outstanding card dues.	Credit card fraud is a risk that all cardholders should be aware of, as any thief can access your sensitive information and make unauthorised purchases.
Certain banks offer specific interest-free periods when applying for a new card, which can range from 45 to 60 days.

What Is a Debit Card and How Does It Work?

A debit card is one of the most commonly used financial tools, and it helps people carry less cash. This type of card is the official “bank card,” which directly helps in making purchases by deducting money from the official bank account anywhere in the world. Citizens can also use these in any ATM Machine to deduct money from their respective bank accounts.

Most debit cards charge a certain processing fee for every transaction and cash withdrawal from an ATM not affiliated with your bank account. Some banks reward loyal debit card customers with credit rewards, improving their overall credit score and increasing their bank balance. You don’t need to keep a minimum bank balance account on a debit card, as you don’t need to repay any money.

You can set limits for debit card payments, which means you cannot spend more than a certain amount in one 24-hour period.

Pros and Cons of Using A Debit Card

These are the official pros and cons of using a debit card, which will help you decide whether or not to apply for the same.

Benefits	Drawbacks
Compared to standard credit cards, debit cards are safer since they need a PIN for purchases and ATM withdrawals, adding a layer of protection.	Debit cards often come with spending limits, which can be inconvenient when making large purchases. Some purchases might even require additional authorisation, adding an extra step to the purchase process.
Debit cards, as opposed to credit cards, limit daily spending and stop completely once the account’s balance is zero.	If you forget your PIN, your card could become completely useless unless recovered, which can take several days.
All types of debit cards allow for easy cash withdrawal, and you can also use any other bank’s ATM.	If you accidentally overspend with your debit card, your account might turn negative, and you will be accountable for hefty overdraft fees.
Most debit cards don’t require an annual fee and are often exempt from any large-sum maintenance fee.	You can’t use debit cards for medical emergencies or immediate car repairs if you don’t have any cash in your account. Credit Cards can help you in certain emergencies.
Applying for a debit card doesn’t require bank approval and is easily available when opening a checking account.

How Is A Credit Card Different From A Debit Card?

Both debit and credit cards are important financial tools that help in financial planning and management. They help assess and spend money, but while one offers limited funding, the other binds the borrowers with huge bills at the end of the month.

Here are some of the metrics where a credit card differs from a debit card:

Metric	Credit Card	Debit Card
Limits for Withdrawl	The bank sets credit card payment limits according to the borrower’s credit score and outstanding payment obligations.	Debit Card payment depends on the availability of bank balance in the account.
Paying Off The Card	You must make mandatory credit card payments according to your pre-set monthly cycle.	There is no scope for pending payment as the money will be deducted directly from the bank account
Security	Credit Card requires a set PIN for payments, and the payments made by this can be easily refunded if done by fraudulent means.	Debit Cards also require a PIN payment, but they do not provide much customer satisfaction if money is accidentally deducted by the cardholder.
Internet Rate	Credit cards have a high interest rate, which applies to the principal amount spent.	Debit Cards don’t have any interest rates.
Additional Charges	Credit Cards have fewer charges.	Debit Cards might charge for every transaction.
Spending Habits	This is good for immediate payments, reservations for goods/ services offering special discounts and emergencies.	This card is good for daily use payments and controls expenses, preventing overspending.
Impact on Credit Score	This card can majorly increase/ decrease your credit score.	This card has no impact on your credit score.
Impact on Bank Balance	This card does not impact the bank balance as the bank makes each payment.	This card reduces the bank balance with each transaction.
Refunds	Credit card payments and reservations are just pre-deposits that users can withdraw before the monthly cycle bill arrives.	Refunds are difficult as the bank deducts money from the account during transactions.

When To Use Credit Card Over Your Debit Card and Vica Versa

Credit Cards offer great purchasing power but charge a huge interest on each payment. On the other hand, debit cards have limited purchasing power but are free from any monthly bills and sudden financial strains. Here is a guide on what type of payments you can make from each card to make better financial decisions.

When To Use Credit Cards

To protect yourself from fraud on large purchases like fridges or AC
When you are planning to apply for a loan and need a good credit score with a regular bill payment history
For making hotel reservations and travel plans, you are unsure of and might need a refund
For earning cashback points

When To Use Debit Cards

Managing everyday expenses
Paying off outstanding debt (even for credit cards)
To avoid additional interest
To prevent extra monthly fees
For smaller sums of payments