When we are in an urgent need of finances, we often tend to use the most convenient form of dent available handy – Credit cards. However, we fail to realise that we could be spending a major chunk of our income towards paying off highly charged financial instruments like these. At such times, you can look for an alternative such as an overdraft facility in order to meet your financial needs at more favourable terms.
Though both these facilities are used to address short-term financial needs, there are certain factors you must consider while selecting the debt type.
Credit Cards –
Credit cards allow you a 50-60 days interest- free borrowing period post which you are liable to pay interest of 24-36% (calculated annually) charged on the remaining unpaid amount after you have cleared the minimum payment due on your account. This is without a single doubt beneficial for individual expenses that are a result of short-term or sudden cash needs. However, we fail to understand that the interest chargeable on these convenient financial instruments is way higher than that charged on the forms of debts. There are also other charges applicable on the usage of credit cards. You would be charged a maintenance fee which is calculated annually. You may also be levied penalty for making late payments and / or for defaulting on your payments.
On the other hand;
Overdraft facility –
An Overdraft facility allows you to acquire a credit line which provides you a certain amount in your overdraft account. It offers you the facility to make withdrawals multiple times as and when you desire and as per your requirement. What highlights the benefit of an overdraft facility is that it gives you the option of paying no interest on any amount that’s lying unused in your overdraft loan account. Also, you can avail a much higher credit line as compared to that offered on credit cards. This makes this debt facility a more affordable as well as more need specific loan. So if you have a long tail expense lined up an Overdraft facility suits best in such situations.
You may take the following example to understand this further –
Let us take this into consideration, that you have an overdraft facility of ₹20 lakhs and credit cards with a total limit of ₹6 lakhs. In a situation of urgency, you need to make purchases worth ₹8 lakhs. You will be able to transact for a maximum of ₹6 lakhs with your credit card depending on the limit unused. You will yet have to borrow a sum of ₹2 lakh either from a friend or you will need to apply for some form of debt or a personal loan. In such a scenario, it would be best to use an overdraft facility. The funds are readily available, it saves you the time and hassle of requesting for a loan from an acquaintance, and you will have to pay interest only for the number of days for which you have borrowed the ₹8 lakhs (amount overdrawn).
You must make an analysed decision when it comes to opting for a credit card, overdraft facility or a personal loan keeping in mind your cash requirement, tenure, amount and affordability of each form of loan.