What are Credit Cards? Understanding the Difference Between Credit and Debit Cards

With a credit card, you unlock a world of convenient and secure online shopping and swift payment options. Join us as we explore this superior card and its endless benefits!

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Credit cards are increasingly popular due to their convenience and the benefits they offer users. But do you truly understand how they work and how they differ from debit cards? Let’s explore this together in the article below.

1 What is a Credit Card?

What is a Credit Card?

A credit card is a “spend now, pay later” card that was introduced in 1951. It allows cardholders to make purchases without having the funds available at the time of the transaction and then repay the full amount owed to the bank at the end of a set period.

Credit cards are used for payments at various merchants, such as supermarkets and online retailers, as a convenient alternative to cash. The two main types of credit cards are domestic and international credit cards.

2 Functions and Features of Credit Cards

Functions of Credit Cards

Functions of Credit Cards

Delayed Payment Option: You can make purchases, pay bills, book flights, and more without having the funds available in your account. You will have a grace period of approximately 45 days to repay the full amount without incurring any interest. After this period, the bank will charge interest at the prevailing lending rate.

Cash Advance: While it is possible to withdraw cash using your credit card, it is generally advisable to avoid this due to the high fees and interest rates associated with cash advances. The average fee is between 2-4% of the withdrawn amount.

Installment Payment Plans: Some retailers and online stores offer the option to pay in installments using your credit card, often with attractive interest rates, including 0% interest. This feature allows you to acquire desired items without the financial burden of a lump-sum payment.

Features of Credit Cards

Features of Credit Cards

When you use a credit card for a purchase, the bank provides you with a pre-set spending limit, known as a credit limit, and you are not required to have the funds available in your account. This limit is determined based on various factors, such as your income and assets. At the end of the billing cycle, you are expected to repay the full amount you have spent, as per the bank’s agreement.

3 Distinguishing Between Credit and Debit Cards

Distinguishing Between Credit and Debit Cards

Debit Cards

  • Definition: A debit card is a payment card that serves as a replacement for cash. It allows cardholders to spend only the funds available in their linked account.
  • Card Structure: On the front, a debit card typically has the word “DEBIT” printed above or below the card issuer’s logo. It also features the logos of associated organizations (Visa, MasterCard), the cardholder’s name, card number, expiration date, and security features. The back of the card includes a magnetic stripe that stores encrypted security information.
  • Functions: Cash withdrawals, money transfers, payments, mobile top-ups, and other utilities.
  • Requirements: Obtaining a debit card usually requires only basic documentation, such as a valid ID or similar identification.
  • Spending Limit: Cardholders can spend up to the amount available in their linked account.
  • Credit History: Using a debit card does not impact an individual’s credit history.
  • Fees and Interest Rates: Debit card fees (for cash withdrawals, transfers, and annual charges) are generally lower than those of credit cards. Internet banking fees may or may not apply, depending on the bank. International debit cards tend to have higher fees than domestic ones.

Credit Cards

  • Definition: A credit card is a payment card that follows the principle of “buy now, pay later.” Cardholders can spend up to their credit limit and are required to repay the full amount within approximately 45 days.
  • Card Structure: The front of a credit card typically displays the word “CREDIT” (although some banks may omit this) and an electronic chip. It also features the bank’s logo and that of associated organizations (Visa, MasterCard), the cardholder’s name, card number, expiration date, and security features. The back of the card includes a magnetic stripe, a CVV/CVC security code, and a signature panel.
  • Functions: Credit cards are used for shopping, payments, and installment plans with attractive interest rates, sometimes as low as 0-1%.
  • Requirements: To obtain a credit card, individuals must provide proof of income, such as salary slips, employment contracts, etc.
  • Spending Limit: Cardholders can spend up to their assigned credit limit without having the funds available in their account.
  • Credit History: Credit card fees (for cash withdrawals and annual charges) tend to be higher than those of debit cards. Internet banking is often provided free of charge. However, cardholders who fail to make timely repayments will incur high interest rates similar to the bank’s lending rates.

This article has provided a comprehensive overview of credit cards, and we hope it empowers you to use this financial tool wisely and effectively.

Frequently asked questions

A credit card is a payment card issued by a bank or financial company, which allows the cardholder to borrow funds to pay for goods and services. The key feature of a credit card is that it provides the borrower with a line of credit, which is a predefined amount of money that the cardholder can use to make purchases. The borrower is then expected to repay the borrowed amount, with interest, at a later date.

A debit card is also a payment card, but unlike a credit card, it directly deducts funds from the cardholder’s bank account to pay for goods and services. With a debit card, the cardholder is limited to spending only the available funds in their account, and there is no predefined line of credit involved.

The main difference lies in the source of funds used for transactions. A credit card provides a line of credit, allowing you to borrow money for purchases and pay it back later, whereas a debit card directly accesses your bank account to make payments, limiting your spending to the available funds in your account.

When you make a purchase using a credit card, the card issuer pays for the transaction and essentially lends you the money. You then receive a bill at the end of a billing cycle, which includes all your purchases made during that period. You have the option to pay the full amount due or make a minimum payment, with the remaining balance carrying over to the next billing cycle, accruing interest.

Credit cards offer several advantages, including building a credit history, earning rewards points or cashback on purchases, and providing purchase protection and extended warranties. They also offer a level of convenience and security, as they can be used for online shopping and often come with fraud protection policies.

The primary risk with credit cards is the potential to accumulate debt if they are not used responsibly. Interest charges can quickly add up if you carry a balance, and late or missed payments can negatively impact your credit score. It’s important to understand the terms and conditions of your credit card to avoid these pitfalls.

The choice between a credit and debit card depends on your financial discipline, spending habits, and goals. Credit cards offer more benefits and protection but require responsible management to avoid debt. Debit cards are simpler and limit your spending to your own funds, but may offer fewer perks.
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