16 Jan 2014

Debit Card vs. Credit Card

What is the difference between a debit and a credit card ?

A debit card also known as an ATM (Automated Teller Machine) card is connected to your bank account. Anytime you use your debit card at a store, the money is withdrawn from your bank account. We can also use this card at an ATM to withdraw cash which comes out from our account. 

A credit card is a card which gives you credit ! Whenever you use a credit card for any transaction, it is like taking a loan which you are supposed to pay off by the due date. If you do not pay it off, you are hit by high interest rates. 

Advantages of A Debit Card

1. Debit cards link to your bank account and keep track of your spending.
2. You are unlikely to spend more than what you have on your bank account.
3. It is very convenient to use a debit card to withdraw money from an ATM.
4. Depending on the bank, an individual can get a free debit card if they have a salary account or maintain a certain minimum balance. 

Disadvantages of a Debit Card

1.If you overdraw your account, your account is charged with overdraft fees.
2. If you are the victim of fraud or your debit card gets stolen, money can be taken out from your account and your account security is compromised.
3. Most banks charge a fee for a debit card ranging between Rs.100 to Rs.500 per annum. 

Advantages of A Credit Card

1. Credit cards give you a certain spending limit and some time to pay off the minimum balance.
2. If your card gets stolen or you are the victim of online fraud, money is not going out of your bank account. The fraudulent charges are usually taken care of by the credit card company as long as you report it on time. 

Disadvantages of a Credit Card

1. It is easy to go overboard with a credit card. One can give into temptation and shop more than they can afford.
2. One has to remember to pay off the credit card on time. If not, your credit score will get effected. 
3. "Minimum Payment" - It is easy to get confused with the term "minimum payment" and think that is the due amount. The amount due, is the total account balance. 
4. The interest rates on credit cards can be quite high - 30 to 40% per annum. It is like having a loan with an exorbitant interest rate. 
5. Most credit cards have an annual fee which is waived if you spend over a certain amount. It can be difficult to keep track of spending and you may be tempted to spend more so as to get your annual fee waived.

Debit Card vs. Credit Card - Which is superior ?
This is the tougher question to answer. Most personal finance experts swear by a debit card. This card ensures you track your spending and do not spend more money that you have in your bank account. You also do not have to remember to pay the card by due date since the money is being deducted from your account and your are not hit by high interest rates if you forget to pay the card. 

Confession -  I swear by a credit card as long as there is no annual fee. I am a person who remembers to pay cards by due dates and do not overspend. I set reminders on my calendar and like the fact that if I am ever hit by a fraudulent transaction, the money is not gone from my account. I can cancel the card, follow the fine print on the credit card agreement and hopefully get the fraudulent charge waived. 

Request - No matter which card you use, please do not use your credit card to withdraw money from an ATM. This process charges you an interest rate higher than other purchases. E.g. if your credit card interest rate is 30% per annum, your cash advance interest rate could be as high as 40 %. If you use another bank's ATM, both your bank and the other bank will charge a fee over and above the higher interest rate. It is a terrible and a very expensive way of getting money.

Which card works for you ? Please share your thoughts.

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