There are different modes of payment by which a money payment can be made to purchase goods and commodities. The most common method is handing over direct cash.
In most situations, giving cash cannot be used as a payment mode due to various reasons and difficulties related to handling several cash notes of different denominations. Instead, the Overdraft and Credit card are two other means by which payment can be made.
An Overdraft is a credit facility accessed using the bank account after approval. It is analogous to personal loans. An overdraft facility allows the person to withdraw more money than what they have in their history.
A Credit card is a type of thin plastic card used as a means of payment in which charges are made against a line of credit instead of the account holder’s cash deposits. When a credit card is used to make a purchase, that person’s account gathers a balance that must be paid off each month.
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 often 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 generally charge you an annual fee, whereas overdraft charges only apply if your overdraft is above a specific limit.
Want to save this article for later? Click the heart in the bottom right corner to save to your own articles box!
Comparison Table
| Parameter of Comparison | Overdraft | Credit Card |
|---|---|---|
| Purpose | It is a facility provided by banks like a traditional loan and is generally not used to pay temporary expenses. | It is a mode of payment used as a substitute for cash and should be physically carried everywhere. |
| Interest Rates | No interest-free period but it has a better rate of interest which are lower than that of credit cards. | It has an interest-free period, and the rate of interest is comparatively higher |
| Usage | Overdraft is generally used by big enterprises which are involved in trading. | All individuals can use a credit card |
| Facility | Overdraft is a credit line given for a short duration by the bank | Credit cards are provided by most banks, and the amount has to be paid within the stipulated time |
| Annual Fees | Overdrafts have no annual maintenance fees for maintaining the line of credit. | Credit cards have an annual application fee, also known as the maintenance fee, which is calculated annually. |
What is Overdraft?
A credit agreement made between a bank and its account holder to withdraw more money than already exists in the account provided to the given approved limit is termed an overdraft facility.
A line of credit can be provided to an account holder based on the account holder’s balance. And it will be provided as a pre-sanctioned loan considering account holder assets such as shares, bonds and fixed deposits as collateral.
Based on the asset provided by the account holder as collateral, the overdraft limit and its related interest will be charged.
Overdraft is something similar to an approved loan. The account holder can withdraw the money whenever required and need to pay the money borrowed and its related interest for the given time.
Account-holders such as individuals running small businesses will get the benefits of resolving the cash flow issues with the help of an overdraft facility even though they have a negative balance which should get repaid within a month.
What is Credit Card?
A credit card is a thin plastic electronic card provided by financial institutions that can be used as a means of payment and is a substitute for cash for paying temporary expenses.
The credit card can be used to make instant purchases without cash in hand. The usage of a credit card is more convenient, and the card can be physically carried everywhere to make the payment by swiping or tapping across the card reader machine.
The credit card’s key advantage is it is provided with interest-free credit for 50-60 days. An individual can use the credit limit for the given time duration on attaining the prior approval.
The usage of credit cards often comes with various features such as loyalty or reward points, discounts with various merchants, cashback, etc. Paying credit card bills on time is very important for maintaining a significant credit history.
Main Differences Between Overdraft and Credit Card
- Overdrafts and credit cards are a means of payment as a substitute for cash. They are easy and convenient to use for various reasons. The main difference between an Overdraft and a Credit card is the interest rate calculation and the usage method.
- Overdraft does not benefit in the form of special offers, whereas credit cards provide reward/loyalty points, cashback offers, and other attractive features to lure customers.
- The overdraft provided by the banks does not have an interest-free period, and the interest is levied only on the withdrawn amount. But in the case of credit cards, a certain amount of interest-free time is provided to pay the bills, failing which the amount levied would be huge.
- Overdrafts are generally used by big enterprises dealing with trading and financing. Still, any individual can use credit cards for their expenses which can be repaid later within the due date.
- Overdrafts provide better rates of interest when compared to credit cards, and no additional maintenance fees are levied. In contrast, credit cards incur additional fees, such as an annual maintenance fee and a loss and damage fee, in case the card is stolen or damaged.
- https://brill.com/view/journals/flc/6/3/article-p369_2.xml
- https://www.law.gmu.edu/assets/files/publications/working_papers/1360.pdf
I’ve put so much effort writing this blog post to provide value to you. It’ll be very helpful for me, if you consider sharing it on social media or with your friends/family. SHARING IS ♥️
Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
