Overdraft VS Credit Card - Check Differences Between OD & CC.

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Differences Between Overdrafts and Credit Cards

There are significant differences between OD vs CC, such as the requirement of security, interest rates, and more. Some of these differences are highlighted in the table below:

Factors	Overdrafts	Credit Cards
Interest Rates	Overdrafts typically carry higher interest rates as compared to credit cards	Credit cards offer lower interest rates
Security	Banks grant overdrafts based on credit history, investments, and the relationship with the bank	Credit cards do not require collateral, as they are unsecured loans
Purpose	Overdrafts can be used for various types of financial requirements	Credit cards come with no restriction on end usage, meaning the funds can be utilised for various requirements
Loan Amount	Banks determine the loan amount based on security deposits	Banks determine the loan amount based on your borrowing history and credit score
Limits	The limit of an overdraft decreases each month	The pre-approved credit limit resets to zero when you pay the previous balance
Account	You can access overdrafts through an existing account	You can use credit cards with both new and existing accounts
Tenor	The tenor of overdrafts ranges from 1 month to a maximum of 1 year	You need to repay the total or minimum due amount each month

Understanding How Overdrafts Work

An overdraft facility is provided exclusively through a current account, which is only available to business owners, companies, or institutions. With an overdraft, you can make payments from the account even when funds are insufficient.

It is important to note that the overdraft facility is only offered to existing current account holders, with limits decreasing monthly. As the overdraft is secured, its provision depends on financial statements and security deposits made by you as a business owner.

With an overdraft, you can enjoy a longer repayment tenor of up to 1 year. However, the overdraft limit depends on your creditworthiness and your relationship with the bank.

Understanding How Credit Cards Work

A credit card acts as a revolving line of credit, offering flexibility and no restrictions on the usage of pre-approved amounts. After the billing cycle ends, you receive a statement and must repay the total amount by the due date. The statement includes:

Purchases and payments made with the card
Interest charges on carried balances
Applicable fees and charges, like late payment fees, cash advance fees, etc.

Credit cards also offer additional benefits, such as rewards points, cashback, or travel perks, making them a valuable tool for managing personal finances while earning incentives.

Similarities Between Credit Cards and Overdrafts

Now that you know how overdrafts and credit cards work, here are some similarities between the two:

The interest rates apply to the utilised amount, not the principal sum borrowed
The sanctioned loan amount remains fixed, and additional withdrawals are not permitted. However, credit card limits can be increased over time

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Does an OD affect your CIBIL score?

An overdraft can impact your CIBIL score if you do not make repayments within the due date.

What is the interest rate on ODs?

The interest rate on overdrafts varies depending on the type of overdraft and the issuing bank. Compare options from various institutions if you have multiple accounts when selecting an overdraft to get you the best interest rates.

Should I consider a loan, credit card or overdraft?

Choosing between a loan, credit card, or overdraft depends on your financial needs. Overdrafts are useful for short-term requirements, but they often come with high interest rates. On the other hand, credit cards offer flexibility. Personal loans may be better if you need more significant amounts with a longer repayment tenor.

Is it better to use a credit card or overdraft?

Credit cards typically have lower interest rates than overdrafts, which could be an ideal option for short-term needs. Overdrafts tend to have higher interest rates and may be good for financial emergencies.

Is it better to use an overdraft or a line of credit?

A line of credit typically offers lower interest rates than an overdraft. The right choice depends on your specific financing needs.

Should I clear my overdraft or credit card first?

When funds are limited, it is advisable to pay off shorter debts first. However, with sufficient funds, it is better to prioritise clearing the more expensive debts. The decision depends on your financial situation.