How credit cards and debit cards work in Kenya
Credit cards and debit cards are both widely used for making purchases and conducting financial transactions. While they are similar in appearance, there are fundamental differences in how they operate.
How do they work?
1. Credit cards:
Credit cards are typically issued by banks or financial institutions.
– Line of credit: When you use a credit card, you are essentially borrowing money from the card issuer to make a purchase. The issuer sets a predetermined credit limit, which represents the maximum amount you can borrow.
– Monthly billing cycle: For each billing cycle, typically a month, the credit card company keeps a record of your transactions. At the end of the billing cycle, they send you a statement summarizing your purchases, outstanding balance, and minimum payment due.
– Minimum payment: You have the option to pay the full outstanding balance or a minimum payment, usually a small percentage of the total balance. However, paying only the minimum payment will result in interest charges on the remaining balance.
– Interest and fees: If you don’t pay the full balance by the due date, the remaining balance accrues interest charges, typically at a relatively high rate. Credit cards may also have annual fees, late payment fees, and other charges.
2. Debit cards:
They are;
– Linked to a bank account: Debit cards are linked directly to your bank account. When you make a purchase using a debit card, the funds are deducted directly from your account and you can open one at www.rg.co.ke
– PIN or signature: Debit card transactions require you to enter a Personal Identification Number (PIN) at a point-of-sale terminal or sign a receipt to authorize the transaction.
– No borrowing: With a debit card, you can only spend the money you have in your account. There is no borrowing involved, so you won’t accumulate debt or pay interest.
– Overdraft protection: Some financial institutions offer overdraft protection, allowing you to make transactions even if your account has insufficient funds. In this case, the bank may cover the difference and charge you an overdraft fee.
In summary, credit cards allow you to borrow money up to a set credit limit, with the obligation to repay it over time. Debit cards, on the other hand, directly deduct funds from your bank account to complete transactions, without any borrowing involved.