What is difference between credit and debit card?

 

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Credit cards and debit cards are both plastic payment cards that look similar, but they function differently and serve distinct purposes. Here are the key differences between credit and debit cards:

1. Source of Funds:

• Credit Card:
  • Credit cards provide a line of credit issued by a financial institution. When you make a purchase using a credit card, you are essentially borrowing money from the credit card issuer, and you need to pay it back by the due date to avoid interest charges.
• Debit Card:
  • Debit cards are linked to your bank account. When you use a debit card for a transaction, the funds are directly withdrawn from your checking or savings account.

2. Overdraft and Spending Limits:

• Credit Card:
  • Credit cards typically have a predetermined credit limit, which is the maximum amount you can borrow. Going beyond this limit may result in declined transactions or fees.
• Debit Card:
  • Debit cards are limited to the available funds in your linked bank account. If you attempt a transaction exceeding your account balance, it may result in an overdraft fee, declined transaction, or automatic transfer from a linked account.

3. Interest Charges:

• Credit Card:
  • If you do not pay the full balance by the due date, the credit card issuer may charge interest on the remaining balance. Interest rates can be relatively high.
• Debit Card:
  • Debit cards do not involve borrowing money, so there are no interest charges associated with regular transactions. However, overdrafts or certain bank services might incur fees.

4. Building Credit History:

• Credit Card:
  • Responsible use of a credit card, such as making timely payments, can contribute to building a positive credit history. This can be important for obtaining loans or other credit in the future.
• Debit Card:
  • Debit card transactions do not impact your credit history, as they are not reported to credit bureaus.

5. Security and Fraud Protection:

• Credit Card:
  • Credit cards often come with more robust fraud protection. Many credit card issuers offer zero-liability policies, which means you're not held responsible for unauthorized transactions.
• Debit Card:
  • While debit cards also have fraud protection, the process and liability rules may differ from credit cards. Reporting unauthorized transactions promptly is crucial for minimizing liability.

6. Rewards and Benefits:

• Credit Card:
  • Credit cards frequently offer rewards programs, cash back, travel benefits, and other perks. These rewards are often tied to spending on the credit card.
• Debit Card:
  • Debit cards may have fewer rewards and benefits compared to credit cards. Some debit cards, however, offer cash back or other incentives.

Understanding these differences can help you choose the right card for your specific financial needs and habits. Some individuals use both credit and debit cards, each for different purposes and situations.

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