Before finding the right option, knowing the difference between your options is important. Overdraft is a facility given by the banks to its customers, which allows them to withdraw more money than they actually have in their account. This is like a loan given to customer by the bank, whereby it extends the credit limit of the customer.
Customers can withdraw money or write cheques of greater amount than the actual deposits they have in their account. In other words, this facility allows customer to keep on withdrawing money up to a certain limit, even if account balance is zero.
If you own an overdraft account, your bank will cover your cheques from bouncing. Customer pays interest on the extra withdrawn amount. Few banks charge fee for each overdraft and few charge fees annually. Overdraft credit limit depends on the policies of banks and customer’s credit rating.
On the other hand, Credit card is issued by a bank or any other financial house, allowing its holder to purchase commodities or services on credit. Credit card holders draw on a credit limit which was offered to them by the financial institution.
Credit limit is decided by individual’s credit rating. Card holder must pay back within in the time limit given to them; else they will have to pay higher interest rate on the credit they have taken. They may be charged with penalties too.
The only thing that you need to keep in mind while using your credit card is to spend it wisely. If you do so, it is almost interest free for the credit period that you have got from the bank. However, once your credit period is over, the interest rates are way too higher than all other banking products and services.
Overdraft is handy if you don’t need a large amount. If you need little amount of money and that too for short period of time, overdraft facility is always a better option. You are not supposed to pay each month a certain amount. Usually the interest rate on an overdraft is much lower than that on a credit card.
However, lower or higher interest rates depend on repayment of extra money withdrawn. If customer is repaying quickly, credit card is much better option because almost all credit cards allow customer to spend interest free for certain period of time.
This interest free credit range varies from 30 to 60 days. After this limited time if you don’t repay the credit you have taken, it is very expansive; you will end up paying much higher than the actual amount.
Hence, when you have to borrow money, both overdrafts and credit cards are effective solutions, provided these are used for short period of time. Both have flexibility and can use effectively to cut cost in short term.
Both have their own pros and cons. In long run, overdraft is much better than credit cards and in short run credit card is very cost effective. It is always better to avoid late payments to avoid inconvenience in both the cases.