16 September 2023

Advantages and disadvantages of credit cards and debit cards in India

Advantages and disadvantages of credit cards and debit cards in India

Credit cards and debit cards have become an integral part of modern financial transactions in India but they have some advantages and disadvantages, which all users must note (Photo: Pixabay).
They may offer convenience, security, and ease of use, but they also come with their own set of limitations.

Let us explore the major differences between credit and debit cards in India and discuss their respective benefits and drawbacks.

Ownership and usage
Credit cards: Credit cards are essentially a line of credit (loan) extended to you by the issuer of the card.
When you use a credit card, you are essentially borrowing money that you have to repay at a later date.
Debit cards: Debit cards, on the other hand, are linked to your bank account.
When you use a debit card, the transaction amount is deducted directly from your bank account. So, you are not borrowing but spending your own money.
Interest rates
Credit cards: One of the key advantages of credit cards is the ability to make purchases on credit.
However, this convenience comes at a cost in the form of interest rates.
If you do not pay your credit card amount in full by the due date, you will be charged interest on the outstanding amount.
The following formula is used to calculate credit card interest:

Credit card interest = [(Total Number of Days from the Transaction Date x Outstanding Amount x Credit Card Interest Rate Per Month x 12 Months)] ÷ 365 Days
Credit card interest rate in India can vary from 2.5 per cent to 4 per cent per month, which is exorbitantly high. The interest rate is decided by the credit card issuer.
So, assuming your credit card interest rate is 3.5 per cent per month, if you do not pay your dues for a year, this interest will touch 3.5 per cent X 12, which is 42 per cent.
If your outstanding amount, is say, Rs 10,000 for a year, you may have to pay 10,000 X 42/100 + Rs 10,000 = 14,200. (Calculation shown here is in simple interest and gives a rough estimate of the interest amount to be paid).
For non-payment, the due amount actually attracts compound interest every month on the outstanding amount.

But if you pay your dues immediately, you will shell out only Rs 10,000, interest being zero.

Debit cards: Debit card transactions do not accrue interest because you are spending your own money.
This can save you from paying high interest rates, making it a financially responsible choice.
Credit score impact
Credit cards: Using a credit card responsibly can impact your credit score positively.
Timely payments and credit utilisation in a responsible way can help you build a strong credit history.
This is essential for obtaining loans and financial products in the future.
Debit cards: Debit card usage does not directly affect your credit score because you are not borrowing money. It does not affect your credit history in any way.
Rewards and benefits
Credit cards: Most credit cards in India offer rewards, cashback, and various perks such as travel miles, discounts, and exclusive access to events.
These incentives can be an advantage if you pay off your credit card balance on time and use it wisely.
Debit cards: Debit cards usually do not offer as many rewards and benefits as credit cards.
While some banks provide cashback on specific transactions, these rewards are generally more limited compared to credit cards.
Overdraft protection
Credit cards: Credit cards can act as a safety net during emergencies or when your bank account balance is low.

You can make essential purchases even if you don’t have sufficient funds in your account.
Debit cards: Debit cards do not offer overdraft protection. If you attempt to make a transaction without sufficient funds, it will usually be declined, potentially causing inconvenience.

Security features
Credit cards: Credit cards often have advanced security features such as EMV chips, PIN numbers, and fraud protection.
In case of fraudulent charges, you can contest them. So often, your liability is usually limited.
Debit cards: Debit cards also come with security measures but may have different liability rules.
If you don’t report unauthorised transactions immediately, you may not be able to recover your lost money.

Financial discipline
Credit cards: Credit card owners need discipline to avoid overspending and accumulating debt. If not managed responsibly, it can be the source of financial troubles.
Debit cards: Debit cards cater to responsible spending as you can only use the funds available in your bank account. So, there is no question of accumulating debt.
READ ALSO | RBI’s master directions for credit, debit card issuance

We see that credit cards provide flexibility, rewards, and the opportunity to build a credit score but have the risk of high-interest rates and a possible debt.
Debit cards give more financial control and security but may lack the rewards and benefits associated with credit cards.
So, in India, both credit cards and debit cards offer distinct advantages and disadvantages, which we must try to use optimally.

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