Debit Cards / Credit Cards
A debit card is a plastic card that provides a cardholder electronic access to his / her bank account. It can be used to withdraw funds or to make purchases using money in the bank account. Since a debit card is essentially linked to a checking account (saving / current), it is also known as a Checking Card. A balance in the checking account is must for the use of debit card.
Credit card allows its holder to buy goods and services based on the holder’s promise to pay for these goods and services.
A credit card is a payment card which allows the cardholder to pay for goods and services on the basis of line of credit granted to him / her by the issuing bank. A credit card essentially creates a revolving account from which cardholder can borrow money for payment to merchant (and also withdraw cash). A credit card is not linked to a bank account but is linked to the bank / financial institution which has issued it.
First Credit Card of the world
The use of Credit Card first started in 1920s in United States of America for selling the fuel to the automobile owners. Later, it reached the customers when when Diners Club was launched in early 1950s. In 1958, the Bank of America issued the BankAmericard in the California state and this is known to be the first successful modern credit card.
Differences between Debit Card and Credit Card
- A debit card is like an electronic cheque book, which is linked to the account of cardholder. Balance in the account is essential to use debit card. Credit cards give a line of credit to the cardholders and they don’t need a linked bank account. Credit Card payment is like a loan which needs to be paid back within a fixed period (such as 30 days).
- There is no monthly bills to be paid on debit cards. In case of Credit cards, monthly bills need to be paid by the customer. Late payments are charged a high interest.
- Obtaining the debit card is quite easy. Now a days, most banks provide Debit cards to checking account holders. After the RBI guidelines in 2005; obtaining a Credit Card has become difficult and it depends on many factors including credit score of the applicant.
- The Credit worthiness of the account holder plays no role in case of Debit Cards. The limit of usage is dependent on the balance in linked account. However, in case of credit cards, the limit of usage or credit line may increase or decrease depending on cardholder’s creditworthiness. This limit is set by the card issuer.
- Debit Card payments invite no interest charges; Credit card loans have one of the highest interest rates.
Major players in the Credit Card transactions
There are several players in the working of credit card / debit cards.
- The cardholderis the authorized user of a credit or debit card.
- Merchantor Point of sale is any business entity that is authorized to accept cards for the payment of goods and services; it can be a brick and mortar shop or a website.
- Merchant Bank or Acquirer is a financial institution that provides card processing services to the merchant.
- Card Issuer is a financial institution that issues payment cards and contracts with its cardholders for billing and payment of transactions.
- Further, there is a Credit Card Network orAssociation, which is a membership organization of financial institutions that issue payment cards and/or sign merchants to accept such cards for payment of goods and services. There are two Credit Card Associations – Visa’s and MasterCard.