Credit scores over debit

The cost factor
If you have a credit card that does not incur an annual fee and you use it smartly (read, never revolve credit and pay bills before the due date), it works out cheaper than a debit card. This is because a debit card comes with an annual fee of around Rs 100, plus an issuance fee. You might soon be able to use your debit card at any ATM without paying a transaction fee, but banks will try to increase profits by imposing an additional fee on its usage. Moreover, according to bankers, service charges on debit cards are set to increase after March 2009.

Building credit history
The concept of evaluating creditworthiness is taking off in India. Establishing a higher credit score will not only help you bag softer interests and insurance rates, but also get you quicker loans and preferential treatment. Using a credit card wisely is the best way to build a good credit history.

Consumer protection
Both credit and debit cards are protected against fraudulent use by the zero liability scheme. However, you still have to take steps to keep your cards safe—and this is easier with a credit card. You can impose a limit on your credit card, which is far lower than the sanctioned credit limit. This will help regulate spending and reduce liability in case of a fraud. There is no such facility for a debit card. Also, with a credit card, you don’t have to pay the disputed charges till the issue is resolved. In case of a debit card, while you may get your money back within 60 days, in the interim period, your reduced bank balance may cause other transactions to default, leading to substantial penalties.

Easy cancellation
While the travel industry allows booking with a debit card now, it’s safer to use a credit card. In case of a cancellation, the advance booking amount is automatically reversed if a credit card has been used. With a debit card, the money is refunded by cheque, so the settlement takes longer.

Keeping track of finances Contrary to popular perception, the temptation to spend is greater with a debit card than a credit card. Lulled into a sense of security that you cannot exceed your repayment capacity, you tend to be lax with the debit card and can lose track of the balance in your account. Apart from the penalty for dropping below the average quarterly balance requirement, banks are now imposing a fee for declined debit card transactions. Also, unlike in a debit card, you pay your credit card bill at the end of the billing cycle, so your money continues to earn interest in the bank. Your earning potential falls if you swipe your debit card regularly.

Rewards for usage
Aggressive card-users can earn more rewards on a credit card, like free air miles for frequent fliers and free stays for those having a co-branded hotel credit card.