So, everything is going cashless in India. Nice. Now, for the average Indian, the first step to being cashless is getting a debit card. Debit cards have been there in the country for a long time and everyone is familiar with using it. Mobile wallets is a new thing and you need to learn to use them. Debit cards on the other hand is easy to use. Also, they come free with your bank account most of the times. So, just start using them isn’t it? No. Debit cards are easy to use I agree, but not the smart choice. I’ll tell you why.
First of all, you need to understand what a debit card is meant to be used for.
Debit cards are like prepaid mobile connections. You load up the money (which is the money in your bank account) to your debit card and use it to purchase things as long as the money remains in your account. Once the money is over, no more purchasing. Simple as that.
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The only difference is that instead of using cash, you are using debit cards. You are definitely cashless, but there are no other benefits.
Credit cards on the other hand are like post paid connections. You can buy whatever you want, and at the end of the month, you have to pay the bill.
Now, I know what you are thinking. Just because a credit card lets you buy anything you want, doesn’t make it a better option, right? In fact, isn’t it a trap?
Actually no. The thing is, be it a debit card or credit card, you should know how to manage your expenses. Debit card or credit card, if you go about buying whatever you want, you are in trouble.
But with credit cards, not only you have the buying power (because your credit limit is most of the time 5X your income) but you also get benefits. Ok, this is where it gets complex. Let me explain.
Credit cards are of different types. There are regular credit cards, there are cash back credit cards, travel credit cards and more. Each credit card is designed for the user’s requirement and each of them mostly will have what is called a “point system”. Or something like a reward system. Which simply means that when you use credit cards, you get reward points.
Still tough to understand, here is a sample scenario.
You have 1,000 Rupees with you in your bank account. And you have a debit card with which you can buy anything you want. The limit is 1,000 Rupees as you only have that much amount in your bank account. So, you buy something from Amazon, for 500 Rupees. You have 500 Rupees balance with you.
Now, let’s say you have a credit card with a limit of Rs.5,000. Which means, you can buy anything from Amazon ort anywhere else for Rs.5,000. So let’s say you buy the same thing you bought with the debit card for Rs.500 from Amazon.
In the debit card’s case, as you buy the item from Amazon, your money is gone straight from the bank account, immediately. You end up with Rs.500 for the rest of the month.
But in the credit card’s case, your 1,000 Rs remains in your bank account, even after you have bought the product from Amazon. Also, you don’t have to pay the bill for the rest of the month. You only need to pay it after the bill comes. Which is typically the month end. Even then, you have additionally 30 days to pay the bill without any interest (in most card cases).
So what is the difference? In the case of debit card, you “prepaid” for the product you bought, just like using cash.
But in the case of a credit card, you bought the product without any money going from your bank account. You have 30+ rest of the days in that month to pay the bill. So, that gives you additional 30+ days with cash in hand.
To top things up, let’s say your credit card is an excellent cashback card. Then, you get a 5% cashback on your purchase. Which means, at the end of the year, you will get 5% back on your purchase. Plus, if it is a good credit card, you will get additional points against that purchase. Say 5 points for each Rs.100, so 20 points in total. Which when accrued, you can buy other things.
- Low or no fees
- Cash in hand
- Limits over spending
- High risk of fraud
- Doesn’t build credit history
- No rewards, perks
- Overdraft fees
- No “float time”, lose funds immediately
- Builds credit score
- Earns rewards
- Gets perks & benefits
- Extended fraud protection
- Time to pay charges
- Easy to resolve disputes/fraud
- Annual fees & charges
- Interest charges on unpaid balances
- Risk of over spending
- Hard to qualify for
So, this is the basic difference between a debit card and credit card. But wait, there’s more.
Let’s say you lost your debit card – pick pocketed! All the money in your bank account is at risk. If the thief manages to withdraw all the money in your account, some way, you’re in trouble. Hopefully, the bank detects fraud and recovers all that money but it is still a risk.
If your credit card is lost however, you are not at risk of losing your savings. The thief might buy something with your card and max it to the limit. But if you report it promptly to the bank, they will block your card (same in debit card) and investigate fraud on it. Which means, there is no risk to you. If found fraud, you don’t have to pay for anything the thief did. And you have your hard earned savings money saved in your bank account.
Last, and the most important factor is the credit score. This concept is still not very popular in India. I have written an in-depth article on what it is over here, check it out. Basically what it means is that, there is a point for your trustworthyness. When using credit cards, there is a central agency, which monitors your purchases and how often have you been paying back your bills. If you have been paying back on time without default, your score goes up. If not, you get bad score. Other companies and agencies use this score to evaluate whether or not to give you more products. Products like personal loan, home loan etc.
The important point about credit score is that if you have been paying your bills with a debit card, you will not get any credit score. Even if you’ve been buying a lot and paying the bills on time. Your credit-worthyness is non-existent. However, if you’ve been buying things with a credit card and have been paying bills on time, your will have a high credit score.
So, there you have it. While going cashless is a great move for the country, just using debit cards is not going to help you much. It might help the country and its economy as everyone is going cashless with a trackable trail of wealth. But for you to make the most of it, you should start using credit cards and make the most of them, adding points to your credit score.
All the best.