Reasons Why Personal Overdrafts are better than Credit cards

Posted by Trishya Sharma on December 3rd, 2019

Applying for a credit card? Choose Personal Overdraft instead!

Among types of credit facilities accessible, credit cards are used by most of the millennials followed by personal loans. The use of either or both depends on the sort of needs someone has.  One may wonder that how can a personal loan match benefits of the credit card but, there is new kind of loan  - Personal Overdraft, a line of credit facility for professionals -  which behaves like credit card but at the cost of personal loan.

In this article, we are going to explore how Credit Card and Personal Overdraft work and which one is a much better credit tool for short term credit conditions and in which situation

Credit Cards- An easy instrument to manage monthly cash crunch

Credit cards are easy substitutes for cash.  A superb tool to handle finance in time of cash crunch and in addition to convenience.  The most important advantage of using credit card would be the interest-free period/grace interval (for 30-60 days ) under which someone can utilize free of charge the total credit limit as per the pre-approved credit limitation or as determined by credit card issuing company.  Even though the majority of the credit card holders pay additional attention to the yearly fees and the total credit limit being sanctioned while applying/using a credit card, it's primarily the rate of interest that is most critical and can make your credit card possession a pricey affair, if not handled well.

How do credit cards work?

In the event, the total used amount isn't paid prior to the cycle, then two choices are given to the credit card holder. Either pay total amount together with the interest or cover a minimum sum that's mainly the interest component. If one gets to the procedure for paying only minimal sum charges monthly and retains using their card, then the general outstanding on credit card and the interest rate to be paid becomes extremely huge.

Throughout the grace period, the expenditure made through credit cards does not bring in any finance charges.

Among the other essential principles of credit card spending would be keeping a healthy Credit Use Ratio at 30 percent or less of their overall available credit limit.

Personal Overdraft Loan:

 The Personal Overdraft is a credit line which enables loan holders make withdrawals in tranches from  their pre-approved credit limit.

To put simply, when you've got an approved credit limit of Rs 1,00,000 and you want to use just Rs 30,000, you withdraw Rs 30,000.  But how can that help?  To begin with, An Overdraft facility includes nearly half of the interest rate (1.2-1.8 percent monthly ) compared to interest charged by credit cards (3-5 percent ).  It aids in building fiscal discipline in comparison with credit card.  It is even so because you repay the amount as the interest is paid as instalment on monthly basis

Here are the 3 reasons that make Personal Overdraft better product than Credit Card

a) Lower interest rate:

With tailored interest charges, which can be conducive to pay back the dues, private overdraft is especially made with long-term payment choice in your mind.  The rates of interest on overdraft is unlike the rate of interest of 30-45 annual percent on credit cards as compared to 15-20 % of personal loan.  As a revolving credit facility overdraft is a better option.

b) Availability of easy cash:

A overdraft loan provides access to cash in times of need .  If you withdraw cash from credit card, it ends up to be expensive as it includes extra fees.

c) You’re in control of your spending

When you avail an unsecured loan, you agree to a borrowing limit with the lending company.   You pay monthly interest outgo towards the loan.  This helps build credit score that is better and is better than paying minimal due of credit card charges on monthly basis.  Payments of interest on Salary Overdraft loan are viewed as signs of financial discipline by the credit reporting agencies such as Equifax, CIBIL or even Crif.  However, paying minimum amount due leads to pending payment on the card and might eventually negatively impact credit score.