Credit Cards V Bank Overdrafts

by : Devin Gilliland

When it comes to borrowing money both bank overdrafts and are seen as effective solutions in the short term. Both have inherent advantages such as flexibility and short-term cost effectiveness, but what are the disadvantages and how should you decide which is the best solution for your circumstances?

Credit Card Advantages

1. Should you borrow money and pay the amount off by the end of the month, most credit card providers will not charge a cent.

2. Should you complete a purchase with a credit card, and later find a problem with the item, then the credit card company will withhold payment from the retailer/provider until everything is resolved.

Credit Card Disadvantages

1. Long term interest rates are higher with a credit card than they are for a bank overdraft.

2. Credit card fraud is on the rise, and although the credit card companies are willing to burden most of the cost, people could still have to pay around $50 should this happen to them.

3. Should you intend to withdraw cash then your company may charge you a per transaction or percentage rate.

Bank Overdraft Advantages

1. Should you have a bank overdraft then you can easily avoid fines in your bank account, because this will automatically be covered by your overdraft.

2. Bank overdrafts are often the most cost-effective way to borrow money over a period of several months. Your bank may be able to offer better interest rates than your credit card provider because they can earn money from customers in multiple ways, including mortgages, payment services and savings accounts.

Bank Overdraft Disadvantages

1. Bank overdrafts can be called in at any time by your bank. What does this mean? Although it is unlikely, your bank may ask that you repay your balance within a small amount of time or face legal action and closure of your bank account. Depending on state civil law they may also be allowed to use retention, meaning that if you do not pay your bank overdraft balance, they could remove this from your savings account for example.

2. Bank overdrafts will charge you based on an average of your ongoing balance rather than the "amount at the end of the month". This means that should you borrow for a short period of time, and pay the balance in full, you will still be charged for borrowing.

3. Unlike a credit card provider, your bank will not provide any security in terms of holding back payment from unscrupulous suppliers.

Should you intend to borrow money through credit card borrowing or indeed through a bank overdraft, then it is fundamental that you recognise the inherent problems that can occur if you have no obvious way of financing it. It is recommended, that unless your income will increase, or your expenditure will decrease in the coming months that you avoid borrowing money.