Can I Use My Overdraft Instead of a Credit Card?

Mar 07, 2016

You have an overdraft to your disposal, but is it perhaps a better option to use a credit card?

What is a credit card?

A credit card is a small plastic card issued by a financial institution. This card gives you the possibility to buy items on credit. Buying something on credit means you kind of take out a loan to purchase the item. You buy that item now with the bank’s money. At a later stage you will repay the bank. Interest may be added if a credit card is overdue.

What is an overdraft?

An overdraft facility is usually connected to a cheque account. You can only use the amount of money that is within your cheque account. However, an overdraft is an option to use money that isn’t in your bank account yet. There is a limit to an overdraft facility. There are monthly fees to an overdraft facility. There is a type of penalty fee payable on your account if you make use of an overdraft without applying for one at your bank.

In essence both of these products are a type of credit agreement. They both have limits and are due for repayment on a specific date.

The difference?

But an overdraft can be overkill. If you think about it – an overdraft is basically a credit card without a credit card. In fact, the card connected to the cheque account is your debit card. This is turning into a big paradox. By making use of an overdraft, you make purchases through a debit card. You are using your current account (which should have cash on hand) to make more debt. This debt will have a service fee connected to it and an interest rate if this account should be in arrears for too long.

Fincheck understands that an overdraft facility is a handy cushioning for unexpected expenses and debit orders. But a debit order or expense should never go of your account without your knowing or consent. Somewhere or somehow you must have given the authority for an expense to be deducted from your account. You, first of all, must have supplied your details. It is not conducive to your financial wealth to pay such high fees to such a small credit agreement.

If it is more credit you want, why don’t you increase the limit on your credit cards?

Fincheck would not recommend being careless and applying for credit beyond your means of repayment. Especially not in the times we find ourselves in. The question remains, though – why would I still want to use my overdraft facility if the cost is such expensive banking fees?

There are obviously favorable situations for an overdraft. But they are significantly less. Some credit cards even have the luxury of being interest-free for an initial period of time.

So what's the conclusion here?

It is a no brainer – already having a credit card must eliminate your need for extra credit on demand (credit on demand does not refer to loans). You really need to start asking some probing questions about your lifestyle if you are in need of a facility that enables you to spend amounts exceeding your bank balance.

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