It must be very common for you to see someone paying for the bill with their credit card or debit card. Both Debit and Credit cards are very convenient and easy to use and they also remove the hassle of keeping cash every time in the pocket. But have you ever thought about the difference between these two? Both the debit and the credit card look exactly the same but there’s a huge difference in the way they both work. Let’s understand in detail:
Meaning: A credit card is an instrument that allows you to borrow money against your line of credit. You can use this limit (credit limit) to make transactions anywhere. The Bank will charge you in the form of finance charges for the services you availed with the credit card. A credit card comes in many types, like reward-based cards, mid-range cards, premium cards, secured cards, and charge cards. A Debit card on the other hand is linked to your bank account. Every time you use your card to make payments, the bank will deduct the same amount from your bank account. However, you do not need to pay finance charges on such transactions as the money is yours.
Annual Charges: With most credit cards, you have to pay a fixed fee, known as the annual fee. This fee is different from bank to bank as mostly depends upon the type of card you chose. If the card is a premium one, then the fee would be big and vice versa. On the other hand, debit cards do not have any joining or annual fees which makes them more convenient to get.
Reward points/cashback: If you do a transaction with a credit card, then you will earn reward points or cashback for those spends. You can use these points to redeem for exciting benefits which will ultimately save you money. But with debit cards, you do not earn any rewards or cashback.
ATM Withdrawals: Whenever you withdraw cash from ATM with a credit card, the bank charge a cash advance fee on the transaction amount. Moreover, the same will also carry finance charges which makes it tough and not worthy to withdraw with credit cards. But with debit cards, you do not face such charges and can get the cash at no cost at all.
Credit score: When you use a credit card, your credit score is also impacted. The way you use the credit card will be reflected in your score. Therefore, if you the card wisely then it will help you to build a good credit score. However, debit cards will not help you to build a credit score at all.
Additional Reading: Do’s and Don’ts To Improve Your Credit Score