Well, that’s a fascinating question, and I am sure, like me, you must have often wondered why or if credit cards are better than debit cards. To the latter, my answer would be yes, depending on how you use it. As for the former, we will discuss the same, in depth, in this article. Let’s start with the basics.
What’s a credit card?
A credit card is a money card, which usually comes in the size of a photo ID and gives its holder the ability to make financial transactions, even if they do not have any money in their bank accounts.
Credit cards are a type of loan cards. Through a credit card, the bank offers its holder a fixed amount of credit (money) which he/she can use for making purchases, pay bills and make other financial transactions. The benefit is that you can use money even if you do not have any in your bank account. The catch is that you have to pay the money back in a fixed period (usually 30-45 days). No charge or interest is levied for that particular period.
Now, to the next point.
How is a Credit card different from a Debit card?
If you are reading this article about credit cards, I believe you must also be aware of the concept of Debit cards. Debit cards are money cards which, just like Credit cards, can be used for making financial transactions and payments.
The major difference between a debit card and a credit card is that, in order to be able to use a debit card to make a transaction, you must actually have money in your bank account. The money is debited from your bank account every time you make a transaction.
So, I guess, by now, you must have a clear idea of why people use credit cards. It is to enjoy temporary money loans from banks without having to pay interest.
Now, another question that comes to mind is – What’s in it for the banks (or credit card companies)? If they are not even charging interest on credit cards, how are they making money from it? Let’s figure out.
Why are Credit Card companies practically giving them away? How do they benefit from it?
Well, the first thing you should know is that credit cards are issued by Credit card companies, such as Visa, American Express, MasterCard, etc., and not by the banks. As for how they make money from it, here are some common ways:
- Credit Card Fees
- Interest on late payments, money withdrawal, etc.
- A percentage of the transaction price from the merchants
So, the more you transact with your credit card, the more commission the company/bank gets. As a credit card holder, you should be worried about the first two charges. However, there are some ways to avoid paying these as well. For instance, some credit card issuers will offer you a rebate on annual fees if you make transactions worth a certain amount. As for the “interest” part, you can simply avoid that by being responsible with your finances and paying your dues (card bills) on time.
Now that you have a better understanding of how credit cards work, let’s come back to the original question of this article.
Why should you use a Credit Card over a Debit card, or should you?
So, it all comes down to this one question – should you be using a Credit Card? In one word, my answer is yes. As for “why”, I have here multiple points that will prove how credit cards are better than debit cards. So, let’s get started.
Well, the ultimate benefit of using a credit card is that you’re using someone else’s money. So, even in case if the money is stolen or your card is hacked, you’re not liable to pay anything, given that you file a dispute immediately. On the other hand, a debit card fraud will simply result in you losing your money, at least for the time being. By using a credit card, you can minimize that risk.
The idea of a loan where you do not need to pay interest, at least not for a specific time period (30 to 45 days), is what has millions of people hooked to credit cards. And there is nothing wrong about it. If you are responsible and committed to paying your card bills on time and spend only what you can afford, there is no harm in using a credit card. In fact, it is the best way to arrange quick money in case of an emergency and not have to pay any interest or penalty on the borrowed amount, as long as you pay back on time.
Credit card companies offer security to their users in terms of buyer protection. Each company has different protection features and rules regarding different credit cards and buyers. For example, some companies offer coverage against accidental damage of the items purchased using their credit cards. Banks like HDFC offer a damage/accident insurance for products above a certain price range, along with accidental insurance for the holder of the card. Similarly, some credit card companies offer other security features such as theft protection, extended warranty on products, no-cost EMI, etc., for the purchases made via their cards. The insurance period may range from one to three months, depending on the card company.
Other than the purchase protection, your credit card company may also offer other added benefits, such as extended warranty and price protection, on the purchases made using the credit card. It, therefore, would be wise to know about all these benefits in advance.
Extended warranty protection involves additional warranty for your purchased products, usually electronic appliances such as smartphones and TVs. Most companies just double the original warranty for up to a period of one year. So, if you are already getting a year warranty on your new smartphone, it may be extended up to 2 years by your credit card company.
Price protection is a benefit which ensures that you always get the best price for products purchased via a credit card. This way, if you purchase an item at a higher price than what another merchant has been offering, your card company will pay the difference back to you. Nice, right? But first, confirm that your card comes with this benefit before you go on a shopping spree.
Rewards (Points/ Cashback)
Reward points are probably one of the best benefits of owning and using a credit card. Most credit card companies give you reward points or cash back for every transaction you make using your card, including shopping, bill payments, and others. So, an obvious benefit of using a credit card over a debit card is that you’ll be earning cash back or points for transactions that you’d have performed anyways. The points earned via these transactions can be availed either in the form of cash or for other benefits such as free gifts. However, each credit card has different rules for the availing of reward point benefits, so read the instructions properly.
This is the best part, or at least what I think the best benefit, of using a credit card. Depending on who you’re buying the card from, the company may offer you great deals on your credit card transactions. For instance, my bank gives me a free fuel voucher just for spending a fixed limited amount of money every month on the credit card. In addition, I get attractive offers and deals on the merchant websites where I use the card. And that’s not it. There are many other benefits, such as free flight tickets, movie tickets, dinner, etc., that you can win via your credit card spendings. Moreover, some banks will also let you avail an instant loan on your credit card.
Your credit card will ultimately help you build a nice Credit Score. The Credit Score is a criterion which determines a person’s credit eligibility depending on his/her existing dues. The score may differ from one bureau to another. However, a nice credit spending and payment record will definitely help you in building up a good enough credit score.
Wondering why a good credit score is important? Credit Score is used by lenders, such as banks, to determine your eligibility for loans and whether you can pay it back responsibly. If you are already managing a credit card responsibly, making full payments on time, it shows that you can be trusted with someone else’s money. A good credit score is also important for getting low-interest loans, best credit cards, and best mortgage rates.
Debit Cards have cons
Using a debit card seems like the best option when you already have enough money for a purchase. Many people think that debit cards are convenient and help you stay in a budget. These things are true, to some extent. However, I personally think that credit cards are far better in terms of convenience, because more merchants accept, even prefer, credit cards over debit cards. And debit cards are certainly not as secure as credit cards. For instance, money deducted from your account, for a debit transaction, even for a fraud one is a loss anyhow.
Also, debit cards do not usually offer any kind of buyer protection, so you may end up getting an unwanted item for a higher price and cannot do much about it. Even though these cards do not harm your credit score, they also do not improve it. And there are generally no rewards for using a debit card.
Things to keep in mind while using a Credit Card
Get and use a credit card only if you’re responsible with your finances. What I mean to say is it is probably wise to avoid using a credit card if you are, say, a shopping addict. Once you’ve got hands on a credit card with a huge limit, it is easy for other things, like care and control, to slip out of your hands. So, be wise and responsible in using a credit card. Or as I like to say, you should be using the credit card rather than your credit card using you.
Pay your credit card dues on time. Ever wondered what happens if you miss the due date for a credit card payment? The credit card company will charge interest on the pending amount, starting from the minute after the due date ends, as well as a penalty. And this interest fee is high, even more than a personal loan interest rate. So, you should be extremely careful and punctual in paying that credit card bill.
Make sure to pay the full amount before the due date. Paying just the minimum due is not the best idea, as you will still be charged interest on the due amount.
Follow these Credit Card Safety Measures to protect your credit card and money.
- Avoid sharing your card details, PIN and password with anyone.
- Report a fraud transaction immediately to your credit card company.
- Report a stolen or lost card and get it blocked immediately.
- Change your credit card PIN/Password on a regular basis.
- Do not use a public network while making an online transaction with your credit card
- Keep your devices and network private and secure
- Do not save credit card details anywhere, not even on the websites where you regularly transact.
To sum up, Credit Cards should be treated as an asset, something that benefits you. Do not make them a liability by not paying your dues on time. In my view, there are no cons of having and using a credit card, given that you’re responsible enough to keep a tab on your finances. Even though debit and credit cards are practically similar in design and operations, the benefits offered by these cards are different and vary from customer to customer. If you like interest-free loans and consider yourself a responsible buyer, start using a credit card today.