There are different modes of payment by which a money payment can be made for the purchase of goods and commodities. The most common method is handing over direct cash.
In most of the situations, giving cash cannot be used as a payment mode due to various reasons and difficulties related to the handling of several cash notes of various denominations. Instead, two other means by which the payment can be done are the Overdraft and Credit card.
An Overdraft is a credit facility that can be accessed using the bank account after the approval. It is analogous to personal loans. An overdraft facility allows the person to withdraw more money than what they have in their account.
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.
Overdraft vs Credit Card
The main difference between Overdraft and Credit Card is that the credit card providers generally charge you an annual fee whereas overdraft charges only apply if your overdraft is above a certain limit.
Comparison Table Between Overdraft and Credit Card (in Tabular Form)
| Parameter of Comparison | Overdraft | Credit Card |
|---|---|---|
| Purpose | It is a facility provided by the banks like a traditional loan and is generally not used for payment of 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 has a better rate of interest which are lower than that of credit cards | Has interest free period and the rate of interest is comparatively higher |
| Usage | Overdraft is generally used by big enterprises which are involved in trading | A credit card can be used by all individuals |
| Facility | Overdraft is a credit line given for a short duration by the bank | Credit cards are provided by most of the 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 additional money more than already exists in the account provided to the given approved limit is termed as overdraft facility.
Line of credit can be provided to an account holder based on account holder 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 the 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 the cash in hand and the usage of 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. The credit limit can be used by an individual 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. The payment of credit card bills on time is very important for maintaining a significant credit history.
Conclusion
There are multiple forms of debts available in the market that is designed to meet immediate and temporary cash requirements in more favorable ways. Overdrafts and credit cards are two such means by which the cash flow can be maintained.
Income for banks in case of credit cards is from the percentage changed to the merchants, whereas in the case of an overdraft, banks make money only when the overdraft limit is used and the account is in a negative balance at the end of the day.
Whether to use a credit card or overdraft as a suitable option ultimately depends on the spending habits of the individuals and the reason for purchase.
References
- https://brill.com/view/journals/flc/6/3/article-p369_2.xml
- https://www.law.gmu.edu/assets/files/publications/working_papers/1360.pdf