The overdraft never offers any interest-free period, if you are overdue on your account due to an overdraft, then you will immediately be charged interest according to the respective price list.
Would you like to have a quick financial reserve so that you have a place to reach in case of some unexpected expenses? And wondering if the credit card or overdraft is better? What are the advantages of a credit card or overdraft? And what to watch out for? Or is a credit card almost the same as an overdraft, otherwise it is called?
What is an overdraft and how it works
An overdraft, or allowed bank overdraft, is popularly called “bank authorization” to keep you on your account. If you happen to ever be in the middle of a bank account and do not have an overdraft enabled, the bank will charge you very high-interest rates or even various fines. With an overdraft, however, you are allowed to go minus.
Disadvantages of overdraft (compared to credit card)
- The overdraft never offers any interest-free period, if you are overdue on your account due to an overdraft, then the amount used will immediately interest you according to the respective price list
- For an overdraft, you do not receive any discounts or benefits from the bonus program
- In some hotels, car rental companies, etc. (especially abroad), it is not enough that you have a payment (debit) card with sufficient balance, but require a credit card (in order to be able to charge you for the damage)
Overdraft benefits (compared to credit card)
- Opening and maintenance of an overdraft is almost always free of charge (for a number of credit cards regular monthly fees or a fee for issuing a new card are charged = but this is not generally valid for all credit cards)
- If you have standing orders set up in your bank account, you will be paid with an overdraft enabled even if you are on your account at zero (in this situation you could send money from the credit card to another account with a credit card, but this is quite expensive)
What is a credit card and how it works
A credit card is a payment card (classic, contactless, embossed, etc.) for which you have a credit account (credit limit). You can then draw money from it. Almost all credit cards then return some of your paid money in some form. Usually, it is 1 – 3% (exceptionally more). This money is returned to your credit account or transferred to some bonus program (eg life insurance, etc.)
The vast majority of credit cards have an interest-free period (beware, but not always, there are also credit cards, where you, as with overdraft, interest will be charged immediately). Different banks and non-banking companies then often overtake who offers a longer interest-free period. Usually, this is usually 45 – 60 days (can be more or less).
However, a grace period doesn’t mean you have 45 or 50 days to pay. It works differently. As a rule, the interest-free period starts, for example, at the beginning of the month. Payments that you take some time during the first 30 days must be settled within the next 15 days after the end of the month. So if you pay the last day of the month, the real-time without interest is only a maximum of 15 days.
Disadvantages of a credit card (compared to overdraft)
- Credit cards tend to have higher interest rates – 25 – 30% annual interest is no exception
- The credit card usually requires a minimum monthly payment (usually up to 5% of the amount), for an overdraft you can “refund” up to 3 months, the overdraft does not have a minimum payment
- If you pay a larger amount with a credit card and then repay it over a longer period of time, such a loan will really cost you a lot
Credit card benefits (compared to overdraft)
- With a credit card, you can borrow money for free in the short term – if you pay everything during the interest-free period, then the interest is 0%. Some credit cards are without any additional fees, for others, it is enough to pay 3 or 5 thousand crowns every month to get it also free of charge
- With a credit card you can usually set up an automatic repayment so that you always get 100% paid (if you have this money in your current account), you are sure that you will pay everything before the end of the interest-free period, and state
When is an overdraft better?
The overdraft is only suitable for short-term expenditures. For example, if your income is irregular (often with a self-employed person or an entrepreneur), and you need to make regular payments or have enough standing order funds in your account. Then an overdraft is a suitable option. Since there is usually no fee for its existence, you can have it in your account even if you do not use it
Note: here just note that both the overdraft and credit cards are considered “negative” when applying for a mortgage. Respectively, even if you have not used up any of them, your bank will count them in your mortgage or other loan application as if you had used up your entire overdraft credit line or credit card
When is the credit card better?
If you take care of your finances, keep an eye on maturity and have at least basic financial literacy, then the credit card can serve you quite well. With the right credit card or even a combination of two or three different credit cards, you can save even 10 – 20 thousand crowns per year. But you want to be responsible and carefully watch what credit card has an interest-free period or what the connection with it is.
The credit card will also pay off only if you pay your spend during an interest-free period, or a maximum of several days late. If you would buy a more expensive item on your credit card and would like to repay it for half a year or a year, then a loan is much better.
When is no overdraft or credit card suitable?
In a situation where there is no short-term expenditure or a higher sum of money, it is better to look for a loan. Even the most advantageous credit cards rarely have interest rates below 19 – 20%. For a decent loan from the bank, however, you can get interested at 5 – 7%. This can save you several thousand crowns, especially with a larger sum.