On the surface, credit cards and debit cards may appear to be the same thing - they are just plastic that you use to purchase something. However, nothing could be further from the truth. Before filling a credit card application, you should understand the primary difference between the two and their importance.
Simply put, a debit card is what you use when you want to spend your own money, whereas, in case of a credit card, you borrow money from a lender to pay for your expenses. Since you are borrowing money in the latter case, the lender will charge you interest if you fail to clear your debt in specified time.
Needless to mention, opting for a debit card seems like the smarter thing to do. You don’t have to worry about paying your dues and falling into an endless abyss of debts. However, if things were that simple, credit card companies wouldn’t be thriving. There are a plethora of reasons why you should get a credit card and if used responsibly, it can be an asset instead of a liability.
Building Your Credit
When you go to apply for a personal loan or home loan, the first thing that a lender will look at is your credit history and credit score. If you are fairly new to the world of credit, then it is quite likely that you will not have a credit history. As a result, lenders will be reluctant to sanction your loan because they do not know how apt you are at dealing with credit.
That’s why, credit cards serve as an efficient method of building a good credit history. A credit card is a boon if you use it to make purchases that you can afford to pay for in time. Not only does this boost your credit score, but it also teaches you how to handle credit responsibly.
As long as you clear your dues in a timely manner, lenders will no problem in increasing your credit limit and even approving big loans. This is why more and more millennials are choosing to apply for a credit card.
However, this is not possible with a debit card simply because there is no credit involved there.
Exciting Cashback and Reward Points
Credit card companies thrive on people who borrow from them. In order to attract new customers, these companies regularly come up with cashback and reward offers, pertaining to shopping, lifestyle, fine dining, travel, et cetera. In fact, many customers are not even aware that their credit card comes with these features!
Even though debit card companies are not far behind when it comes to such offers, the options here are not as comprehensive as those found with credit cards. For instance, if you are a frequent traveler, then you can opt for a miles card offered by almost all the major credit card companies.
These cards, if used wisely, can help you save a great deal of money in the long run.
Useful, When on a Vacation
Credit cards can make your traveling experience a whole lot better owing to their worldwide acceptance. Many car rental services and hotel chains prefer that their customers pay with a credit card. Similarly, when in a foreign land, it will be easier for you to use your credit card than your debit card. However, keep in mind that certain international transaction fees may be levied every time you make a purchase.
If you are planning a foreign trip and you don’t have a credit card, it is imperative that you apply for a card soon.
Speaking of Fees…
Credit card providers often charge a bevy of fees like annual fee, cash advance fee, balance transfer fee, finance charge, foreign transaction fee, et cetera. Therefore, it is advisable to read the fine print and understand these charges carefully before signing the credit card application.
This is one area where debit card comes out on top. Debit cards have a very little fee (in many cases, it’s zero!) which is why thrifty customers prefer to use a debit card. Although, debit cards lack the perks which are often found on credit cards.
Self-restraint is Important with Credit Cards
With debit cards, consumers tend to be quite frugal since the cards are linked directly to their savings account. With every deduction, they are losing money from their account - which, in turn, keeps them highly disciplined with their expenditures.
However, with credit cards, it is very easy to lose track of expenses and find yourself in a web of debts. The temptation of credit has proven to be a financial nightmare for many, which is why, it is important to be careful when using a credit card. This is the primary reason why many people prefer debit cards over credit cards - controlled spending.
The bottom line is, credit cards are useful when it comes to building a good credit history and boosting your credit score. This is important if you are looking to avail a loan at some point in your life. On the other hand, debit cards come in handy when you need to control your expenses. Depending on your lifestyle, you can choose between the two variants and decide which one is suitable for you.
(This article was originally published on BankBazaar.com)