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Credit Card Vs Overdraft: Which is better

Credit Card Vs Overdraft: Which is better

Finance & Accounting

GlobalLinker Staff

GlobalLinker Staff

5 Aug 2020, 12:40 — 3 min read

In today’s VUCA (volatile, uncertain, complex, ambiguous) world, there may be some sectors—like the services sector for instance—that need funds to survive. Still, swiping your credit card for operational expenses? Have you considered overdraft instead? Let’s explore what overdraft entails and how it scores over swiping your credit card for unforeseen expenses.


Overdraft (OD) explained

Overdrafts are credit facilities that, on approval, can be accessed using your Current account. Overdrafts are similar to business loans in this particular way. When you have overdraft facility at your bank, you can spend more than the actual amount in your attached checking account. The bank will honour it—advancing you the amount, in effect. In exchange for this facility, you’ll be liable to pay the bank interest on the amount by which you overdraw your account. In emergency situations, overdrafts work well, saving you the hassle of a check being rejected for insufficient funds.


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What makes overdraft better than credit cards

  • Lower interest rate

With tailored interest rates, the business overdraft is specifically designed with long-term payment option in mind. The annual interest rates on a business overdraft are generally in the range of 15-20% as compared to the high-interest rate on credit cards of 30-45%. Additionally, with an overdraft, you pay interest only on a utilised amount. Therefore, as a credit facility, overdraft makes for a better choice.


  • Better credit rating

When you avail an overdraft loan, you agree on a maximum borrowing limit with the Bank.  You pay monthly interest outgo towards the monies withdrawn. This helps build a better credit score and is better than paying minimum due of credit card on a monthly basis. Such payments of interest on personal overdraft loan are seen as healthy financial indicators by credit rating bureaus like CIBIL.


  • Easy availability of cash

An overdraft loan gives you immediate access to cash in times of need or crisis at no extra charges. No amount limit is there when it comes to cash withdrawal from an OD. But in credit card there is a monthly limit on cash withdrawal. OD facility is ideal for unforeseen expenses or temporary financial as it gives you the ease of a solid financial reserve. Even though credit cards have cash withdrawal facility, it may turn out to be more expensive as it often comes with additional charges.


All in all, overdraft comes with a much lower interest rate as compared to credit cards and this is a huge plus. It also helps you stay financially disciplined as the withdrawn amount can be repaid anytime without additional charges.


Also read: InstaOD – ICICI Bank’s Online platform for Instant Overdraft


Image source: shutterstock.com

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