Credit cards and debit cards are two of the most common payment methods used in modern society. They both have their advantages and disadvantages, and understanding the difference between the two can help you make an informed decision about which type of card to use in different situations.
What is a Credit Cards?
A credit card is a plastic card issued by a financial institution that allows cardholders to borrow money on credit up to a pre-set limit. The borrower has to pay back the borrowed amount within a specified time frame, along with interest and other charges if any.
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When you use credit cards to make a purchase, you are essentially taking out a loan from the card issuer to pay for the goods or services. The amount you spend is added to your credit card balance, and you have to pay it back with interest.
Pros of Credit Cards:
Offers credit – One of the significant advantages of a credit card is that it offers credit, which can come in handy when you need to make a large purchase or don't have enough money to pay for something upfront.
Build Credit History – Using a credit card responsibly and paying your bills on time can help build your credit history, which can help you in the future when you apply for a loan or mortgage.
Rewards – Many credit cards offer rewards programs that can earn you points, cashback, or other benefits for using the card.
Cons of Credit Cards:
High-Interest Rates – Credit cards typically have high-interest rates, which can make it challenging to pay off your balance if you carry it over from month to month.
Fees – Credit cards can come with annual fees, late payment fees, cash advance fees, balance transfer fees, and foreign transaction fees, among others.
Debt Trap – If you're not careful, credit cards can lead to debt traps, as high-interest rates and fees can make it difficult to pay off your balance, leading to a cycle of debt.
What is a Debit Cards?
A debit card is a plastic card that allows you to make purchases with money you already have in your bank account. When you use a debit card, the funds are immediately deducted from your account, and you can only spend up to the available balance.
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Debit cards are typically linked to a checking account or savings account and can be used to withdraw cash from ATMs.
Pros of Debit Cards:
Zero Interest Charges – Unlike credit cards, debit cards don't charge interest, as you're using your own money to make purchases.
No Debt Trap – Debit cards prevent you from falling into a debt trap as you can only spend the money you have in your account.
No Credit History – Debit card usage does not impact your credit history, as you are not borrowing money.
Cons of Debit Cards:
Limited Protection – Debit cards offer limited protection against fraud and theft, as the funds are immediately deducted from your account.
No Rewards – Debit cards do not typically offer rewards or cashback programs, unlike credit cards.
Overdraft Fees – If you don't have enough money in your account to cover a purchase, you may be charged an overdraft fee, which can be costly.
Key Differences between Credit Card and Debit Card
Credit vs Debit: The primary difference between a credit card and a debit card is that a credit card allows you to borrow money on credit, while a debit card uses your own money.
Interest: Credit cards charge interest on the borrowed amount, while debit cards do not charge any interest as you are using your own money.
Credit History: Credit card usage impacts your credit history, while debit card usage does not.
Rewards: Credit cards offer rewards and cashback programs, while debit cards typically do