A credit card is a payment card that allows the cardholder to borrow funds from the issuer up to a certain limit in order to make purchases or withdraw cash. The cardholder is then required to pay back the borrowed funds, along with interest and any fees, at a later date. Credit cards are widely accepted at merchants and can also be used for online shopping, phone orders, and other transactions. They can also be used to get cash advances from ATMs. Credit cards often have rewards programs, such as cash back or points, for using the card.
Working of credit card
A credit card works by allowing the cardholder to borrow funds from the issuer up to a certain limit, called the credit limit, in order to make purchases or withdraw cash. The cardholder is then required to pay back the borrowed funds, along with interest and any fees, at a later date. The working of a credit card can be broken down into the following steps:
- Application: The cardholder applies for a credit card by filling out an application with personal and financial information. The issuer will then review the application and decide whether to approve the card.
- Approval: If the application is approved, the issuer will send the cardholder a credit card with a credit limit and an account number.
- Purchases: The cardholder can use the credit card to make purchases at merchants that accept credit cards. The cardholder will sign a receipt or enter a personal identification number (PIN) to complete the transaction.
- Billing: The issuer will send the cardholder a monthly statement showing all the purchases made with the card, along with the minimum payment due, any fees, and the due date for the payment.
- Payment: The cardholder can choose to pay the entire balance due, the minimum payment, or any other amount. Payments can be made by mailing a check or by using an online bill payment service.
- Interest: If the cardholder does not pay the entire balance due, they will be charged interest on the outstanding balance. The interest rate can vary depending on the type of card and the cardholder’s creditworthiness.
- Credit Score: Credit card usage and payments are closely monitored and reported to credit bureaus. The credit score of the cardholder is affected by their credit card usage, payments, credit utilization, and credit history.
Types of credit card
There are several types of credit cards, each with its own set of features and benefits. Some of the most common types include:
- Standard credit cards: These are the most basic type of credit card and typically have no annual fee. They may offer rewards or cash back on purchases, but the interest rate may be higher than other types of cards.
- Rewards credit cards: These cards offer rewards such as cash back, points, or miles for purchases made with the card. These rewards can be redeemed for merchandise, travel, or other perks.
- Balance transfer credit cards: These cards allow cardholders to transfer a balance from a high-interest credit card to one with a lower interest rate. This can be useful for those who are trying to pay down debt.
- Low-interest credit cards: These cards have a lower interest rate than standard credit cards, making them a good option for those who carry a balance on their card.
- Secured credit cards: These cards require a security deposit, which acts as collateral for the credit limit. They are often used by people with poor credit or no credit history.
- Premium credit cards: These cards have high annual fees but also offer a wide range of benefits such as travel insurance, concierge service, airport lounge access etc.
- Business credit cards: These cards are specifically designed for use by small businesses and may offer rewards and perks tailored to business expenses.
- Student credit cards: These cards are aimed at students and may have lower credit limits and less strict approval criteria.
A debit card is a payment card that deducts money directly from a consumer’s checking account to pay for a purchase. It is similar to a credit card, but the funds are transferred immediately, rather than the consumer borrowing money and paying it back later. Debit cards are often linked to a personal identification number (PIN) for added security. They can be used for purchases or ATM withdrawals.
Working of debit card
When a customer uses a debit card to make a purchase, the money is transferred from the customer’s checking account to the merchant’s account. The transaction is processed through the card network (such as Visa or Mastercard) and the customer’s bank, which verifies that the customer has sufficient funds in their account to cover the purchase. If the funds are available, the transaction is approved and the purchase is completed.
Debit cards also have a personal identification number (PIN) feature, which provides an added layer of security. When making a purchase, the customer is prompted to enter their PIN, which is verified against the information stored in the card’s magnetic strip or chip.
When the customer uses the debit card at an ATM to withdraw cash, the process is similar. The customer enters their PIN, the ATM verifies the PIN, and the requested amount of cash is dispensed. The customer’s account is debited for the amount withdrawn.
Types of debit card
There are several types of debit cards, including:
- Traditional Debit Card: A standard debit card linked to a checking account. It can be used to make purchases, withdraw cash from ATMs, and pay bills online.
- Check Card: A type of debit card that can be used like a check. It is often used for online or telephone transactions where a physical check cannot be presented.
- Prepaid Debit Card: A type of debit card that is pre-loaded with a certain amount of money. It can be used to make purchases or withdraw cash, but can only be used until the funds on the card are exhausted.
- Secured Credit Card: A type of debit card that is secured by a deposit. It is intended for people with bad or no credit history, the deposit will be used as collateral and the customer can use this card like a credit card, but the amount available will be the deposit made by customer.
- Virtual Debit Card: A type of debit card that is not physical, it can be used for online transactions and it is not linked to any physical card.
- Contactless debit cards: a type of debit card that can be used for small transactions by tapping the card on a payment terminal.
All these types of debit cards are linked to the customer’s checking account and the transactions made with these cards will be debited from the account immediately.
Card and debit companies in India and Global?
In India, some of the popular debit card and companies include:
- State Bank of India (SBI)
- HDFC Bank
- ICICI Bank
- Axis Bank
- Kotak Mahindra Bank
- Bank of Baroda
- Canara Bank
- Union Bank of India
- Bank of India
- Andhra Bank
Internationally some of the popular debit card companies include:
- American Express
- Diners Club
These companies offer debit cards that can be used for purchases and ATM withdrawals at millions of locations worldwide. Many of these companies also offer additional services such as online banking, mobile banking, and rewards programs.
Please note that the above list is not exhaustive and there are many other debit card providers in India and globally.
Important Differences Between Credit Card and Debit Card
|Credit Card||Debit Card|
|Borrows money from the issuing bank, with a credit limit and interest rate||Uses funds from the cardholder’s linked checking or savings account|
|Allows the cardholder to make purchases and withdraw cash advances up to the credit limit||Allows the cardholder to make purchases and withdraw cash up to the available balance in the linked account|
|Cardholder is required to make minimum monthly payments on the outstanding balance||Cardholder’s account is debited immediately for the purchase amount|
|Interest is charged on unpaid balances||No interest is charged|
|May offer rewards and benefits such as cashback or points||May offer fewer rewards and benefits|
|Credit history and credit score may be considered when applying for a credit card||A credit check is not required to obtain a debit card|
There are several key differences between credit cards and debit cards:
- Credit vs. Debit: A credit card allows the user to borrow money from the credit card issuer and pay it back later, while a debit card withdraws money directly from the user’s checking account to pay for purchases.
- Interest and Fees: Credit cards usually have higher interest rates and fees than debit cards, as they are unsecured loans and carries a risk for the issuer. Debit cards, on the other hand, have little or no interest or fees, but may have a monthly maintenance fee or a fee for using certain ATMs.
- Credit Limit: Credit cards usually have a credit limit, which is the maximum amount of money that can be borrowed. Debit cards do not have a credit limit, as the user can only spend the amount of money available in their checking account.
- Credit Score: Credit cards can affect a person’s credit score, either positively or negatively, based on how they are used. Debit cards do not affect a person’s credit score.
- Rewards and benefits: Credit cards often come with rewards and benefits, such as cashback, travel points, and discounts. Debit cards may offer fewer rewards and benefits.
Security: Credit card transactions are more secure as they have a higher level of protection against fraud and disputes, and also have a liability limit on the consumer. Debit cards can also be secure but have a lower liability limit and may not have the same level of protection against fraud and disputes.