Published Article Details

Should you opt for a credit or a debit card?

Posted by: Arti Bhargava on Jul 03, 2017, 06.30 AM IST

Pooja has just started working for an equity broking house. She has gone through the usual routine of opening a salary account and has been given a debit card and a credit card to use. She is a little hesitant.

The credit card allows her to borrow money from the bank, with the promise to pay back the money, in addition to any interest drawn on the amount borrowed. Debit cards, on the other hand, are simpler. They simply provide instant access to her money lying in the bank account. She wonders which is better-to swipe her debit card or credit card at a store? Is there a significant difference? Is one better than the other?

A credit card is and must be treated as a form of a loan. Credit card usage amounts to spending money that we do not have but agree to pay back, with some interest. The key thing to bear in mind in case of a credit card is that timely repayments will help you build a good credit history, which will come in handy when you wish to apply for loans.

However, the same advantage can come back to bite if one were to miss a repayment schedule. This is probably the reason why credit cards typically come with reward points, freebies and upgrades, depending upon usage. Moreover, the amount of protection with credit cards is much higher in case of a fraud, theft or duplicate charge.

The key advantage with a debit card, however, is that Pooja pays exactly what the item is worth and no more, since there is no interest. Budgeting her expenses will become much easier with a debit card. However, unless reported quickly, theft of her debit card can quickly devastate her bank account. Credit cards have a lot of perceived downsides by those who struggle to budget when using one-overspending, lack of budgeting, interest payments and the like.

So Pooja will have to learn to treat credit with responsibility. Debit has more limitations so she has less room to mess up her finances. Credit provides a little more opportunity but she should be able to handle it well. What it boils down to is that debit card is the simple choice for people who want to spend the money they have without actually carrying any around or any of the conditions associated with a credit card

(The content on this page is courtesy Centre for Investment Education and Learning (CIEL). Contributions by Girija Gadre, Arti Bhargava and Labdhi Mehta.) This article appeared in Economic Times dated Jul 03, 2017, 06.30 AM IST

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