Overdraft provides a temporary negative balance in a bank account, with higher interest rates. A credit card allows borrowing up to a predefined limit, with interest charged on the outstanding balance if not paid in full monthly. Both offer short-term financing but differ in terms of access and cost.
Key Takeaways
- An overdraft is a banking facility that allows account holders to withdraw more money than they have in their account up to a predetermined limit. At the same time, a credit card is a financial product that enables users to borrow money from a credit line to make purchases or obtain cash advances.
- Overdrafts and credit cards provide access to funds when needed and can help manage short-term cash flow issues, but credit cards are specifically designed for making transactions. In contrast, overdrafts are linked to a bank account and accessed through regular banking channels.
- Overdrafts and credit cards have different fee structures and interest rates. Credit cards offer interest-free grace periods for new purchases if the balance is paid monthly.
Overdraft vs Credit Card
The difference between an Overdraft and a Credit Card is that the providers charge you an annual fee, whereas overdraft charges only apply if your overdraft is above a specific limit.

Comparison Table
Feature | Overdraft | Credit Card |
---|---|---|
Definition | An extension of your checking account that allows you to spend more money than you have available, up to a limit | A revolving line of credit issued by a bank or credit union that allows you to borrow money and make purchases |
Purpose | Covers accidental overspending or small cash shortfalls | Finances larger purchases or ongoing expenses |
How it works | Bank automatically advances funds to cover spending beyond your account balance, incurring an overdraft fee | Merchant provides goods or services, you pay later with interest and potential fees |
Repayment | Pay back the borrowed amount plus fees within a short period (next business day) | Make minimum payments monthly, with remaining balance accruing interest |
Interest & Fees | Typically high overdraft fees per transaction, sometimes daily fees | Varies depending on card issuer and creditworthiness, high APR and potential annual fees |
Impact on credit score | Generally doesn’t affect credit score unless chronically overdrawn and unpaid | Regular late payments or exceeding credit limit can negatively impact score |
Approval | Usually offered to existing checking account holders, may require good banking history | Requires credit card application and credit check |
Convenience | Can be convenient for small, unexpected expenses | More convenient for larger purchases and online shopping |
Flexibility | Limited repayment flexibility | More flexible repayment options, can carry a balance over time |
Overall cost | Can be very expensive due to high overdraft fees | Can be expensive if not managed responsibly, but potential rewards and lower interest rates for good credit |
What is Overdraft?
An overdraft is a financial arrangement where a bank allows an account holder to withdraw more money than their account balance, creating a temporary negative balance.
Key Features:
- Flexible Borrowing: Account holders can access additional funds, up to an agreed-upon overdraft limit, providing flexibility in managing short-term financial needs.
- Interest Charges: Interest is charged on the overdraft amount utilized, and the rates may be higher than other forms of credit.
- Pre-approval: Overdrafts are pre-approved based on the account holder’s credit history and banking relationship, making them readily available when needed.
- Repayment Terms: Overdrafts are repayable on demand, but some may have specific terms for repayment. Repaying the overdraft restores the account to a positive balance.
- Fees: In addition to interest charges, banks may impose fees for maintaining an overdraft facility, whether it is used or not.
- Common Usage: Overdrafts are commonly used for covering short-term expenses, unexpected bills, or managing cash flow fluctuations.

What is Credit Card?
A credit card is a financial tool that enables users to make purchases or withdraw cash on credit, up to a predetermined limit. It is issued by banks or financial institutions, offering a convenient and widely accepted means of payment.
Key Features of Credit Cards
- Credit Limit: Each card comes with a predefined credit limit, representing the maximum amount a cardholder can borrow.
- Interest Rates: Credit cards may have variable interest rates, applied to the outstanding balance if not paid in full by the due date.
- Minimum Payments: Cardholders are required to make minimum monthly payments, a percentage of the outstanding balance.
- Rewards and Perks: Many credit cards offer rewards programs, cashback, or travel perks based on the amount spent.
- Fees: Various fees may apply, including annual fees, late payment fees, and cash advance fees.
- Grace Period: Some cards provide a grace period during which no interest is charged if the full balance is paid by the due date.
Advantages of Credit Cards
- Convenience: Credit cards offer a convenient and secure way to make transactions globally.
- Build Credit History: Responsible credit card use can contribute to building a positive credit history, impacting future borrowing opportunities.
- Emergency Fund: Credit cards can serve as a financial backup for unexpected expenses or emergencies.
Considerations and Caution
- Interest Costs: Failing to pay the full balance on time can result in high-interest charges, leading to debt accumulation.
- Credit Score Impact: Late payments or high credit utilization can negatively affect the cardholder’s credit score.
- Financial Discipline: Responsible usage requires disciplined spending and timely payments to avoid financial pitfalls.

Main Differences Between Overdraft and Credit Card
- Nature of Facility:
- Overdraft: Provides a temporary negative balance in a bank account, allowing withdrawals exceeding the available balance.
- Credit Card: Allows borrowing up to a predetermined limit, separate from a bank account, for making purchases or cash withdrawals.
- Access:
- Overdraft: Linked directly to a bank account, and the overdraft limit is determined by the account holder’s relationship with the bank.
- Credit Card: Issued by banks or financial institutions as a standalone credit facility with a predefined credit limit.
- Interest and Repayment:
- Overdraft: Typically incurs higher interest rates, and repayments are made based on the negative balance, with flexibility.
- Credit Card: Involves interest charges on the outstanding balance if not paid in full monthly, and minimum payments are required.
- Usage:
- Overdraft: Primarily used for covering short-term liquidity gaps in a bank account.
- Credit Card: Used for making purchases, online transactions, and cash withdrawals, offering a broader range of financial flexibility.
- Cost Structure:
- Overdraft: May have fees and higher interest rates, especially for unauthorized overdrafts.
- Credit Card: Involves various fees (annual fees, late payment fees) and interest charges, depending on the card terms and usage patterns.
- Associated Accounts:
- Overdraft: Directly linked to a specific bank account.
- Credit Card: Operates independently of a bank account, with a separate billing cycle and statement.
