The term ‘credit card’ is something you may be hearing or seeing daily. Nowadays, it is a very common and acceptable form of paying for bills and purchases.
About 21 percent of all payments worldwide are made with credit cards, according to various sources.
In fact, credit cards rank as the third most favourite mode of payment among consumers and businesses around the world.
Understandably, you may be owning a credit card. Or you might be considering applying for one. Therefore, here are some interesting facts to inform you what is a credit card.
What is a Credit Card?
Credit cards are often called ‘plastic money’ or simply ‘plastics.’ A credit card is issued by a bank, a financial company or a large chain of stores. A credit card allows you to pay bills or make purchases.
In simplest terms, a credit card works on the principle: ‘Buy Now, Pay Later.’ When you pay with a credit card, the issuer allows you to repay the money within 20 to 45 days.
The number of days you can enjoy credit is at the discretion of the issuer. They will inform you in advance of the exact date by which you need to repay the amount.
Types of Credit Card
Broadly speaking, there are two types of credit cards.
Physical:
This is a credit card made of PVC, a kind of plastic. These are the most common types of credit cards in circulation around the world.
They have a 16-digit unique number embossed on the front, an electronic chip that contains your financial information, magnetic strip for swiping at Point of Sale (POS) machine and a paper strip that bears your signature.
There is also a three-digit CVV or card verification code for online transactions. Some credit cards also carry your picture to prevent misuse. Worldwide, all credit cards are of a standard size: 85.60mm X 53.98mm.
Digital:
With online banking and countries moving towards paperless economy, you can also get a digital credit card. A digital credit card will appear on a special app provided by the issuing bank or financial organization.
The numbers are concealed for additional safety. A digital credit card will not have features of a physical one.
Instead, it will have a QR code that a merchant will scan to get payment.
You need to key-in a four or six digit Personal Identification Number (PIN) and verify the payment with a One Time Password (OTP) sent to your smartphone. They also have a three digit CVV for online transactions.
Credit Card Issuers
Worldwide, credit cards are issued by several organizations. They do so independently or in collaboration with banks and financial organizations.
Two of the largest credit card issuers worldwide include:
- Visa International
- MasterCard
Other credit card issuers are:
- Diners Club
- Discovery
- American Express
- Japan Credit Bureau (JCB)
- China Union Pay
- RuPay (India)
Additionally, several large stores worldwide also issue their own credit cards to customers that have good credit scores.
The system of stores issuing credit cards is most common in the US. Giant retailers including Walmart, Target, Kohl’s and others issue their own credit cards for clients that are independent of any financial organization or bank.
For many people around the world, getting a credit card might prove difficult due to any reason. Yet, if you do wish to pay using ‘plastic’ or use alternatives to cash, you can use a debit card.
What Are Debit Cards?
Financial companies that issue credit cards also issue debit cards. Only, stores and other entities do not issue debit cards since they are not authorized to keep your money like a bank.
Debit cards rank as the second most preferred option worldwide to pay bills or make a purchase.
Debit cards are also issued by banks and financial institutions where you hold an account and have funds.
The plastic card you use at an ATM to withdraw cash or make transactions is also called a debit card. It allows you to pay bills or make purchases in place of cash.
You can use a debit card to pay bills or buy something only if you have sufficient money in your bank account.
When you make the payment, this money is instantly debited from your bank balance. Hence the term ‘debit card’.
It is a very safe mode of payment since you do not have to worry about paying something later.
Types of Debit Cards
Debit cards are also available in two variants.
Physical:
A physical debit card is made of PVC, bears a unique 16-digit number and an electronic chip, paper strip for signature and magnetic strip for swiping. They have a three-digit card verification code for online transactions.
Digital:
A digital debit card is issued by banks that are online and provide apps for mobile banking. These cards also have a 16-digit unique number but do not bear your signature.
Once again, payment is by scanning a QR code and verifying through OTP. Digital debit cards also have a three-digit CVV for confirming online transactions.
Difference Between Credit Card and Debit Card
A credit card and debit card have several similarities. They are of the same size. To a layperson, the difference may not be apparent easily. However, here are some major comparision between a credit card and debit card.
- A credit card allows you to buy now and pay later. You can pay for something even if you do not have sufficient cash at hand or bank balance.
- Credit facility is not available with debit cards: the amount of your bill or shopping is debited instantly from your bank balance.
- Studies worldwide show that people land in credit card debts because they end up spending on stuff they do not really need or are unable to control extravagant habits.
- People with debit cards do not overspend because they know that cash in their account is limited.
- Banks and financial institutions will check your credit score before issuing a credit card. Therefore, people with poor credit scores might be unable to get a credit card.
- Debit cards are issued by banks to every account holder. They will never check your credit score before issuing a debit card. Hence, everyone can get a debit card.
- Banks and financial institutions will charge a stiff fee for any cash withdrawals at ATMs made using credit cards. This is because credit cards are primarily to avail credit for shopping and paying bills.
- You will not be charged a fee for cash withdrawals at ATMs made with debit card, provided you are within limits of the permitted free transactions. This fee varies according to bank and your location. Banks with fewer ATMs do not charge fees if you exceed the number of free withdrawals in any particular month.
- Cash withdrawals on credit cards come with a preset limit. Meaning, you cannot avail of cash advance on a credit card over a specified amount.
- There is no limit to the amount of money you can withdraw on a debit card, as long as you have sufficient balance in the bank account.
- There are no prepaid credit cards. However, some banks may seek a security such as Fixed Deposit or other collaterals as security for your credit before issuing a credit card.
- Banks and financial organizations also issue prepaid debit cards. These are usually for travelers such as forex cards, and people making online purchases. Prepaid debit cards allow you to load only a specific amount of money that can be refilled anytime.
- Large financial institutions that issue credit cards also issue debit cards. Only, stores and other organizations that are not permitted legally to keep cash deposits from customers cannot issue debit cards.
- Failing to pay credit card dues on time will attract heavy Average Purchase Rate (APR) or interest. This can go as high as 28 percent to 32percent depending upon the card you hold. If you do not pay the full amount and opt for minimum payment only, the unpaid sum attracts heavy interest or APR.
- Debit card holders do not have to worry about paying APR or interest on their purchases. The amount is debited as soon as they make a transaction. Hence, there is no interest burden on debit card purchases.
- Delays and defaults in paying credit card outstanding amounts can cause you legal problems. The bank or financial institution can file litigation at a court to recover its money. Additionally, recovery agents from credit card issuers can harass you at home and office in some countries till you repay the due amount.
- Debit card users do not have to worry about delays and defaults in payments and any legal proceedings. The money has already been paid and banks or financial organizations have no right to take you to court.
- The number of frauds involving credit cards is much higher than those with debit cards.
- You cannot reserve hotels and certain other facilities in advance using a debit card. They will only accept a credit card to ensure that cancellation fees if any, can be charged.
- You can get a credit card from banks and financial institutions with whom you have no bank account. Debit cards are issued only when you are the customer of the bank or financial institution and have an account.
- A prepaid debit card with a fixed amount can be given as a gift to someone. You cannot gift a credit card to anyone.
- Some banks issue ‘instant-card’ type debit cards, if you lose one. These debit cards do not carry your name. No credit card will ever be issued without your identity.
There are some other minor differences too between a credit card and a debit card. The first is branding. For example, a Visa debit card might bear the logo of Visa Plus while that issued by MasterCard will have a logo that says ‘Maestro.’
Similarities Between Credit Card & Debit Card
Despite these major differences, there are also some similarities in credit cards and debit cards. Here we explore some of these.
- You can get a credit card or debit card for use within your country or internationally.
- Both, credit card and debit card issuers charge an annual service fee. Some issuers waive the fee for the first year.
- It is possible to give add-on or supplementary credit and debit cards to your spouse and children. The credit or money they can spend remains the same as in your bank account or the given credit limit.
- All stores and merchants accept both- credit card and debit card- for payments.
- You can limit the amount of losses suffered on credit card or debit card if they are stolen. To do so, you need to alert the issuing bank or financial organization immediately and file an appropriate complaint with the police.
- Nowadays, credit cards and debit cards come with loyalty programs and freebies such as complimentary accident insurance.
- Whether you are paying with credit card or debit card, the merchant has the right to seek proof that you are indeed its rightful and legal holder.
- Depending upon where you live, merchants can charge a small fee when you pay with a debit card or credit card.
- Both credit cards and debit cards will attract various fees when you use them abroad. These include differences in the exchange rate and foreign transaction charges, among others.
- You can set daily, weekly or monthly spending limits on both credit card and debit card to ensure extra protection and prevent overspending. The bank will alert you when this limit is reached.
Wrap Up
As we highlight, there are several differences and similarities between a credit card and debit card.
Often, we require both to meet our financial commitments. While debit cards have several advantages, a credit card ensures you do not run out of money when you need it desperately for any emergency.
Take those that best suit your personal financial requirements. While every account holder of a bank will surely have a debit card, applying for a credit card is optional.