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What is Overdraft?
Overdraft is a type of personal line of Credit. When you have an Overdraft protection attached to your bank account, you can spend more money than the balance in your account.
Banks often charge you each time you borrow on your Overdraft. Borrowers are also charged an annual interest rate.
Suppose you need Rs 10000 for your home repairs. Even though you only have Rs 2000 in your bank account, you can pay with a check for the entire money. With an overdraft line of Credit, your bank will let you withdraw the money at 18% annually (assuming no compounding or interest paid annually) and pay an overdraft fee. If you want to repay the loan within a year, you’ll need to pay the total amount, including the interest.
There are two types of Overdrafts- arranged overdraft and unarranged overdraft.
Overdraft is a type of Credit that works more as a backup source of money to bridge short-term gaps between income and expenditure.
What is Credit Card?
A credit card enables you to borrow money below a fixed maximum amount from the bank. This amount is known as the credit limit. Each moment, the bank shall send you a statement that shall tell you how much you have spent and what is owed. The bank doesn’t charge you any interest if you pay back the whole amount. However, the bank charges you interest if you don’t pay the entire amount. The interest-free period is generally 60 days.
Credit Card differs from personal loans in that a credit card has no particular repayment term. You keep on making repayments until the balance is paid off.
Credit cards are generally used for daily purchases, several big-quantum requirements, and few particular requirements.
Difference Between Overdraft and Credit Card
An overdraft facility is credit funding offered by a bank to its account holders to withdraw money from the bank, even if their account balance is below the required amount. A credit card is a short-term loan offered to bank account holders to meet their expenses.
Overdraft is quicker to be arranged since it is available as an addition to the bank account. Immediate access to a credit card is not possible. It takes days to arrive after you apply to your bank.
The maximum amount you can withdraw tends to be smaller than on credit cards. Credit limits are much higher than with an overdraft.
Customers don’t have to make monthly repayments. Customers have to make monthly repayments.
For Overdrafts, interest rates are comparatively higher than a credit card. A credit card has low-interest rates. Also, an Overdraft has no interest-free period. Credit card generally has a 60-day interest-free period.
Comparison Table Between Overdraft and Credit Card
|Parameters of Comparison||Overdraft||Credit Card|
|Definition||An overdraft facility is credit funding offered by a bank to its account holders to withdraw money from the bank, even if their account balance is below the required amount.||A credit card is a short-term loan offered to bank account holders to meet their expenses.|
|Access||Overdraft is quicker to be arranged.||Immediate access to a credit card is not possible.|
|Credit limits||The maximum amount you can withdraw tends to be smaller than on credit cards||Credit limits are much higher than with an overdraft.|
|Repayments||Customers don’t have to make monthly repayments.||Customers have to make monthly repayments.|
|Interest||Interest rates are generally higher than credit cards.||A credit card has low-interest rates.|