Saturday, November 12, 2005

Credit Card vs. Debit Card

This post is dedicated to a topic on which I was planning to put down my thoughts for quite some time. But again due to lack of time and other more interesting stories, I could not pen it down. The interest to write on this topic also increased when I saw this particular question in the Open Spaces column of Times of India.
We will begin with the basic definition of a debit card. A debit card is a ISO 7810 card which physically resembles a credit card, and, like a credit card, is used as an alternative to cash when making purchases. However, when purchases are made with a debit card, the funds are withdrawn directly from the purchaser's bank account. A debit card is generally of two types - offline debit card which requires signature while you are paying and an online debit card which requires a separate keypad at the point of sale where one inputs the Debit pin number. Let us look at the advantages of a debit card
  • An easy and hassle free way of paying without usage of cash
  • No need of any cheques etc.
  • Convenient way of withdrawing money from ATM at any point of time at any place
  • Protects one from any kind of cheque defaults or any frauds
  • Ensures payment guarantee to the counterparty

A credit card is a ISO 7810 standard card similar to a debit card in size and shape. Credit card system is a type of retail transaction settlement and credit system, named after the small plastic card issued to users of the system. A credit card is different from a debit card in that the credit card issuer lends the consumer money rather than having the money removed from an account. This means that one gets the funds for a certain period of time which is known as the credit period. The account does not get debited as it happens in case of a debit card.

Now let us look at some of the advantages of a credit card

  • A very safe alternative to cash just like a debit card
  • No need of any cash in your wallet
  • Helps to deal with emergency situations when you do not have enough funds in your account
  • Short term credit instrument and allows to withdraw money from any ATMs as designated on the credit card
  • Allows better utilization of money in terms of placing it in a more profitable place
  • A normal credit period of 50 days for any amount depending on the individual. This allows us to pay back the money at a later period of time.

If we look at the general view of people in India about credit cards, its very biased. In terms of plastic money credit cards were introduced much before the debit or ATM cards came into picture. Usually a credit card is considered to be a dangerous instrument to use by many people looking at the current scenario and the cases which are running because of the credit card frauds in the courts.

Credit card as presented above is not a sweet pill to take. It involves lot of other addendum to it which people may overlook while in a hurry to get one. Some of the them are the Annual Fee, the Life Insurance premium which is coming with all the cards now and other taxes etc. Its also important to study the credit card monthly statement which also involves a catch with it. Normally if we spend let us say 10000 in a month and then the statement comes with all our transactions, there is a small heading at the end which says minimum payment due. This is generally 5 % of the total transaction amount. If we pay up only this amount by the due date and do not pay the rest, then 2.95 % finance charge will be levied on the rest of the amount. This makes the finance charge of close to 36 % per annum and is by all standards very high. This is one main point we need to keep in mind while transacting using a credit card. Another one is the cheque bounce. Once your cheque bounces for a credit card payment, it becomes very difficult than to transact on the card. But with the help of internet banking the need for cheque seems to be going away.

Having said all the above, here is the parting shot. Credit card can be your maker or breaker depending on the way you use it. What you choose to do with it is entirely up to you. Tempting as it might be, there is a huge downside to credit card, which is you OWE money to someone else! And if you know you can't pay back what you owe, don't pay in the first place. There is nothing like buying what you want with your honest hard earned money. At the end of the day those are the things that make you smile because they are truly yours.

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