Difference between a debit & credit card - Motilal Oswal

Difference between a debit & credit card

Today it is hard to imagine life without a debit card or a credit card in your pocket. It is a serious shift to the cashless economy and that trend became  more pronounced after the demonetization exercise in 2016. Indians have preferred debit cards over credit cards as the basic Indian mentality goes against debt. However, the modern generation is not only tech savvy but is also willing to take on debt and play the debt more smartly. Let us look at the key difference between credit & debit card. Have you wondered how does a credit/debit card work in practice? Here are some basic tips on a credit card and on a debit card and how they can actually add value and power to your wallet.

What do we understand by a Debit Card?
Debit cards offer the convenience of a credit card but work in a different way. You can swipe the plastic anywhere but you don’t incur debt. You actually use your bank balance and the debit card normally doubles as an ATM card. You can not only withdraw cash from an ATM machine of a bank but you can also use it for paying for any purchase by swiping at  POS (Point of Sale) machine in any shop or outlet. Debit cards draw money directly from your checking account when you make the purchase. They do this by placing a hold on the amount of the purchase. Then the merchant sends in the transaction to their bank and it is transferred to the merchant's account. It can take a few days for this to happen. However, the moment the transaction is successful, the bank account gets debited to that extent and you get the confirmation by SMS immediately. You can swipe your debit card if you don’t have balance in your bank account. So before you swipe your debit card ensure that your bank account is adequately funded. Otherwise, you could face embarrassment at an outset and also incur an extra charge for swiping without adequate balance. A debit card is tied directly to your savings account. For security, there is a 4 digit PIN to use with your debit card at stores or ATMs. In the past, it was possible to use debit cards PIN. However, now the RBI has made it mandatory that all debit cards should necessarily be chip cards and protected by the PIN for all transactions.

How is a credit card different from a debit card?
A credit card is a card that allows you to borrow money against a line of credit and is also known as a credit limit for the card. You don’t need a bank account for a credit card but you need a good credit standing. The card issuing company (normally a bank) will verify your credit score via CIBIL and normally your credit card is refused if your CIBIL score is way b below 750. Hence make it a point to check your credit score before you apply for a credit card. The usage of a credit card and debit card is the same at merchant outlets. You can swipe the card and enter your PIN and the transaction is done. Unlike the debit card, the credit card is a loan or credit that the bank gives and hence there is an interest charge if the payment is not made on time. Credit cards offer the revolving facility wherein you can pay just 5% of the outstanding and roll over the rest. The only problem is that the outstanding amount attracts an interest cost of as high as 35% per annum. You must therefore run high expenses on your credit card keeping these costs in mind. Avoid using your credit card for withdrawing cash because the charges are very steep, over and above the interest.

What is common to debit and credit cards?


Having seen the differences between debit card and credit cards, let us also look at some of the areas of commonality. Here are 3 such areas.

Credit card and debit cards can be used for offline transactions at merchant establishments and also at online websites. Your purchases on websites like Amazon, Flipkart and others can be paid for with your credit card.

Both credit and debit cards use multi level encrypted security. Hence there is an onus on you also. For example, don’t write down the PIN number, don’t share the PIN and keep changing the PIN at regular intervals. Also use only secured websites and secured internet connections for your online transactions.

Both debit cards and credit cards entail financial transactions and they are just a matter of conveniences. In a debit card you reduce your bank balance and in credit cards you incur a loan. The card is just a front-end facilitator for the transaction.


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