Both credit cards and debit cards are two very important financial instruments that make our lives easier by offering a convenient and cashless method of settling payments, whether offline or online. While debit cards are always issued by banks where one holds a savings account, credit cards can be issued by other card issuer companies as well (although a banking license from RBI is mandatory for issuing credit cards in India). Payments, in the case of both credit cards and debit cards, are processed with the help of Payment networks like Visa/MasterCard/American Express and a payment gateway like BillDesk, RazorPay, PayU, etc. Before we discuss the advantages of credit cards over debit cards, it is imperative to know the similarities and differences between the two financial instruments.
Credit Cards vs Debit Cards: Similarities & Differences
Although credit cards and debit cards are fundamentally different in terms of the financial aspects, they are very much similar as far as the technical aspects are concerned. Before we list out the advantages of using a credit card over a debit card, it is a good idea to be aware of the similarities and differences between the two financial instruments.
Similarities Between Credit Cards and Debit Cards
- Plastic Money: Both credit cards and debit cards are a form of plastic money. Both provide the cardholders the convenience of cashless transactions.
- Payment Mechanism: Both credit cards and debit cards can be swiped/dipped at offline stores for transferring the requested amount to the merchant, and can also be used for online transactions by entering the card’s credentials in the designated fields.
- Credentials: Both credit card and debit cards have a set of credentials- a 16 digit card number, expiry date, CVV and PIN, which are used to authenticate the transactions. Online transactions require the card number, expiry date and the CVV for authentication, while offline transactions are authenticated by simply swiping/dipping the card at the POS/ATM and entering the PIN (POS transactions of small amounts can also be authenticated via contactless transaction over NFC/RFID without entering the card PIN). RBI now compulsorily requires an additional layer of security with OTP for online transactions.
- Payment Processing: As mentioned earlier, both credit card and debit card payments are processed digitally via payment networks and payment gateways. The payment network and payment gateway act as the interface between the bank and the customer by providing the credentials entered by the customer to the bank and then confirming the successful completion of the transaction to the merchant.
Differences Between Credit Cards & Debit Cards
There is only one fundamental difference between a credit card and a debit card as far as the working and functionality of the cards are concerned. In the case of credit cards, when making a payment, the card issuer transfers the requested amount to the merchant on behalf of the cardholder. The amount transferred is added to the cardholder’s statement balance and is to be paid by the cardholder at the end of the statement cycle. Thus a payment made via credit card is essentially a loan issued by the card issuer against a line of credit granted by the issuer to the cardholder.
If the cardholder pays the entire amount on the statement balance by the payment due date, no interest is to be paid by the cardholder, else, if the cardholder defaults on the payment, a hefty interest (around 3.5% per month) is levied by the card issuer on the due amount on the card’s statement.
On the other hand, the debit card is linked to the cardholder’s savings account. You must have a savings account with a bank in order to have a debit card. The amount paid via debit card is directly deducted from the cardholder’s savings account and paid to the merchant. There is no loan amount or line of credit involved in a debit card transaction.
Advantages of Credit Cards Over Debit Cards
Apart from this fundamental financial difference between credit cards and debit cards, there are many advantages that card issuers offer to credit cardholders over debit cardholders-
- Rewards: You almost always (few exceptions excluded) earn Reward Points/cashback on transactions made via credit cards. Although, nowadays many banks offer debit cards that also earn Reward Points/cashback, the reward rate on debit card transactions is usually very less.
- Additional Benefits: Many credit cards, premium and super-premium credit cards in particular, apart from the Reward Points/cashback benefit, also offer a number of add-on benefits to the cardholders. For example, many credit cards offer complimentary access to lounges at airports/railway stations, complimentary movie tickets, complimentary membership to hotel/airlines’ loyalty programs and many more. Debit cards in most cases do not offer any such benefits, however, some banks like ICICI Bank do offer debit cards that come with benefits like complimentary airport lounge access and free movie tickets.
- Interest-Free Loan: As you know, credit card payments are essentially loans granted by the card issuer against a line of credit which are to be repaid by the cardholder as the credit card bill by the payment due date- usually 20 days after the end of the statement cycle. If the cardholder pays the credit card bill in full by the payment due date, no interest is levied by the card issuer on the amount spent with the card in the given statement cycle. Therefore, if a credit cardholder is financially punctual, they can avail of an interest-free loan for a period of 30 to 50 days- 30 days on purchases made on the last day on the statement cycle and 50 days on the purchases made on the very first day of the statement cycle.
- Co-branded Credit Cards: Many card issuers offer co-branded credit cards in collaboration with an airline, fuel company, shopping website, or mobile wallet. These credit cards offer special discounts/offers on transactions at partner merchants. For example, ICICI Bank Amazon Credit Card earns cashback at an accelerated rate on purchases made on Amazon. Some travel credit cards also earn Reward Points as partner airline’s AirMiles which are automatically added to the airline’s frequent flyer program at the end of the statement cycle. Banks usually do not offer co-branded debit cards in partnership with a third-party merchant.
- In Case of Failure of a Transaction: In case a transaction made via a credit card fails- i.e. the amount is paid from the card issuer’s end but is not received by the merchant, the cardholder does not bear any loss, not even temporarily. The failed transaction is settled between the card issuer and the merchant within a few days without any involvement of the cardholder. However, if a transaction is made via a debit card, the amount is immediately deducted from the cardholder’s savings account and transferred to the merchant’s account. Now if this transaction fails- i.e. the amount is deducted from the savings account of the cardholder and is not successfully received by the merchant, although, the deducted amount is credited back to the cardholder’s account within a few days, the cardholder does have to suffer a temporary monetary loss. Suppose you have a limited balance in your savings account and a transaction made via debit card fails, you can not reattempt the transaction if you do not have enough funds left in your account.
- Additional Security: Credit Cards are more secure as compared with debit cards as most card issuers offer zero-cost liability protection against the loss of the credit card- that is, the cardholder is not liable for any fraudulent transaction made with the card post reporting the loss of card to the credit card issuer.
- Insurance Benefits: Many credit cards offer complimentary insurance covers to their cardholders like personal accidental insurance, insurance against loss/delay/damage of flight check-in baggage, loss of personal/travel documents, etc.
Whether it is rewards and additional benefits or added security, card issuers offer a number of privileges to their credit card customers, which debit card customers usually do not get. If you have a savings account in any bank, you probably already have a debit card which also doubles up as an ATM card. Although you can use the debit card for all your online/offline spendings, given the advantages that credit cards offer over debit cards, you should definitely consider subscribing for a credit card. One point that you must keep in mind is credit cards require financial punctuality. If you are punctual and clear all your dues on time, credit cards can make your shopping experience a really rewarding one- you will not only earn Reward Points/cashback but also get a number of additional benefits.