Personal Overdraft Vs Credit Cards - the better pick?Among the different types of credit facilities accessible, personal loans and credit cards are most commonly used debts You may wonder that how a personal loan can match the advantage of credit card? However a personal overdraft There are and a credit line facility for salaried professionals, Private Overdraft, comes closest to how credit card is used.
In this article, we will explore how Private Overdraft and Credit Card work and which one is a better credit instrument for short term credit conditions.
Credit cards are substitutes for cash. A superb tool for additional finance requirement in addition to conveniently pay are the major reasons why credit cards are favored by many. Credit card is employed in some cases for transactional requirements or small-ticket buys.
Credit Cards- An easy instrument to manage monthly cash crunch
The most important advantage of the credit card would be the interest-free period/grace period (for 30-60 times ) under which an individual can avail credit as much as the pre-approved credit limit, as set by the bank or the credit card issuing company. Post the grace period, a monthly interest is charged on credit that has been utilized or the amount.
Even though the majority of the credit card holders pay more attention to the yearly fees and other similar charges while applying/using a credit card, it's actually the interest rate that is most crucial and can make your credit card ownership a pricey affair, even if not managed well.
How do credit cards work?
During the period or grace period, the accounts on credit cards don't attract any finance charges. In the event the total utilized amount is not paid before the cycle, then two choices are given to the credit card holder. Either pay total amount due along with the interest or cover a minimum sum which is mainly the interest component. If one starts only minimal amount charges every month and keeps utilizing their credit card, then the overall outstanding on credit card and the interest to be paid becomes extremely large.
Among the other important principles of credit card spending would be keeping a healthy Credit Use Ratio at 30% or less of the overall available credit limit. Not only it builds your credibility at the novels of lenders as accountable borrower, but also keeps your obligations.
Personal Overdraft Loan
The Personal Overdraft is a line of credit or loan facility which allows withdrawals to be made by credit holders in tranches from their pre-approved credit limit and pay interest on the withdrawn amount. This works more on the principle of credit card but the re- payment methodology and the interest rate differs.
To put simply, if you've got an approved credit limit of Rs. 1,00,000 and you want to withdraw Rs. 30,000 and pay interest on monthly basis just. But how can that help? First, an overdraft facility comes with almost half the interest rate (1.2 - 1.8 % per month) as compared to interest charged by credit cards (3-5% per month). It aids in building better financial discipline as compared to credit card. It's while you're able to repay the amount anytime without any additional fees because the interest level is paid in instalment on basis.
Here are the 3 reasons that make Personal Overdraft better product than Credit Card
a) Lower interest rate
With tailored interest rates, which are conducive to pay back the dues, personal overdraft is especially designed with long-term payment choice in mind. The annual rates of interest on overdraft is in variety of 15-20% unlike the interest rate of 30-45 percent on credit cards. As a revolving credit facility, personal overdraft loan is definitely a better choice.
b) Availability of easy cash
A personal overdraft loan gives immediate access to cash in times of need at no additional charges to you. There are some expenses wherein you will need cash and may not be able to swipe credit card. Also cash withdrawn from credit card is expensive and again negatively impacts credit bureau score.
c) You’re in control of your spending:
Lending institute pre-approves a borrowing limit and you withdraw in tranches. Every-time you need monies, you ask the lending institute towards disbursal. And the same is done within hours (1-2 hours). You pay monthly interest outgo towards the withdrawn monies. This is better than paying minimum due of credit card on monthly basis and helps build credit rating. Payments of interest on Salary Overdraft loan are seen as signs of financial discipline by the credit reporting agencies like Equifax, CIBIL or even Crif.
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