Amit Sarin, a 23-year-old call centre employee, is confused. He regularly gets calls tempting him to sign on for a credit card.
But the bank in which he holds his salary account has given him a debit-cum-ATM card. The person who gave him the debit card told him it is a convenient mode of payment while purchasing goods. And that is where his confusion begins.
New to both kinds of cards, Amit does not know which card will be more convenient when he goes shopping. For those of you who are confused like Amit, here are the pros and cons of using credit and debit cards.
While credit cards and debit cards may seem similar but they are quite different in the way they work and the services they offer. It's useful to understand the differences and know the advantages and disadvantages of each.
Credit card
A credit card allows you to borrow money when making purchases. The money isn't directly debited from your bank account at the time of purchase; instead, you are sent a bill every month for the sum total of your purchases.
You can choose to either pay your bill in full or in part. If you choose the latter, you will have to pay interest on the balance.
The ability to obtain credit is both a blessing and a curse. It allows you to fund big purchases when you are short of money, giving you the option to pay them off over a period of time. However, you must be disciplined and not spend beyond your means.
If you plan to borrow using your credit card, you also need to understand the terms and, in particular, the way interest charges are computed.
Some of the things you need to check are the annual percentage rate (APR) -- the interest rate for using the bank's money -- and whether there is a grace period for paying the full balance before being charged interest. If there is a 'low interest rate' offer, be sure to read to read the fine print about its duration and conditions.
There are a wide variety of credit cards with different features and advantages. For instance, gold and platinum cards are premium products for customers with high income and net worth. They have higher credit limits and also perks like travel insurance but usually have higher charges as well.
Co-branded cards are another interesting option; they carry the name of a third party, which may be a retail outlet, airlines and so on. Such cards will have benefits whenever you purchase products from the third party. They may also be co-branded with a charity that will receive a fraction of every payment you make with the card.
When choosing a credit card, you need to consider whether you intend to pay your bill fully every month thereby incurring no interest. This is always a good thing to do anyway. If you do pay your bills fully, the interest rate doesn't matter. You can choose credit cards with high interest rates if they offer attractive benefits like zero annual fees and rebates.
Debit card
The word debit means subtract and, as the name suggests, your debit card will subtract money from your account each time you use it.
A debit card has several of the advantages of a credit card in terms of convenience and reducing the use of cash and checks. Furthermore, you can use it as an ATM card as well, to withdraw cash from your account and carry out other ATM transactions.
However, you can't use a debit card to obtain credit. This can be an advantage since you can only buy what you can afford.
Furthermore, you don't have to worry about making regular payments or paying interest rates and penalties if you forget to make a payment. In that sense, a debit card is more convenient than a credit card.
On the flip side, because the debit card is linked to your account, it is less secure than a credit card. An unauthorised user may be able to clean out your account very quickly. This is why it is important to be especially careful when using a debit card.
Make sure you understand the policy in the event of theft or unauthorised use. If this happens, make sure you report it immediately. Memorise your PIN number and never give it to another person. Don't pick a PIN number that is easy to guess, like the last four digits of your phone number. When you make purchases with the card, make sure you take the receipts with you.
As with a credit card, you should know whether there are any annual fees or other fees for specific transactions. Also make sure you understand the policies and fees for using your debit card at ATMs belonging to other banks.
Reader invite:
Dear reader do you have an opinion on the debit card vs credit card subject? What do you think is more convenient to use and what are the pros and cons of using each of them?
Share your experiences of using credit cards and/ or debit cards with getahead@rediff.co.in and we will feature the best entries right here.
