Before we start comparing overdrafts to credit cards, let us understand what they are and how they work.
Primarily, credit cards are substitutes for cash. They also allow you access to credit (typically interest free for 55 days) and often the credit card provider gives you loyalty points for using them.
On the other hand, overdrafts are credit facilities that, upon approval, can be accessed using your bank account. Overdrafts are similar to personal loans in this way.
Both credit cards and overdrafts have fees associated with using these facilities. Credit card providers generally charge you an annual fee whereas overdraft charges apply if your overdraft is above a certain limit.
For example, FNB charges you a monthly fee for overdrafts that are more than R200 and Standard Bank’s limit is R500. The interest rates from both credit cards and overdrafts are personalised, based on your credit rating.
This means that your interest rate for repayment depends on your credit history and usage of credit in the past. Credit cards offer loyalty points whereas overdrafts do not; but both have a debt protection facility.
The requirements for credit cards and overdrafts are similar too. You will need bank accounts, a minimum monthly salary of R3000 and be more than 21 years old to have credit card or overdraft facilities with Standard Bank or Absa. FNB requires a recent pay slip, so the proof of employment is implicit. All banks require you to have a sound credit history and will do background checks before approving credit.
Credit facilities can be used to cover temporary expenses like emergencies or other unforeseen situations. But you have to pay an interest rate that is generally higher than the rate you would get if you invested your money with the same bank. So credit should be used with caution as it also affects the interest rate at which you will borrow in the future.
The decision of which credit facility to choose depends on how much credit is required, for how long and how much interest is being charged.
If the amount of credit required is small and the term is less than 55 days, then credit cards would be the way to go. They are interest free for 55 days, give you access to credit without any extra fees (other than the annual fee for the card) and they give you loyalty points for using them.
Overdrafts on the other hand should be treated as personal loans. They should be used when absolutely necessary (and not otherwise) and should be repaid as quickly as possible. A comparison of the interest rates should also be done while considering which option to choose.
Credit cards generally charge more than usual rates after 55 days whereas overdrafts will charge consistent rates throughout. Hence in the case of longer-term loans, overdrafts may be a better option.