If you have an overdraft line of credit at the Bank, you can spend more than the amount in the account. In exchange for this service, you will pay interest to the Bank on the amount by which you overdraw your account. Some lines overdraft loan will charge you a fee for each overdraft, and some annual fee instead of, or in addition to overdraft fees. An overdraft line of credit is essentially a personal credit line, so the amount the Bank will allow you to borrow will depend on Bank policy and your credit-worthiness.
Credit card is also essentially a line of credit. If you borrow funds to make purchases with it that You can’t pay immediately in full, you will be charged interest. Interest rates on credit cards can vary depending on the card and Your credit score. Many credit cards also charge annual fees.
Comparing the two
In General, whether it makes more sense to borrow via an overdraft line of credit or a credit card depends on several factors:
1. You have access to both options?
2. Do both give enough credit available to cover the amount you need to borrow?
3. Which has a low interest rate?
4. Is there a charge for overdraft when you use the overdraft line of credit?
5. As an option to charge an annual fee?
You will have to do the math for your specific situation to see which option is cheaper.
Suppose you need to borrow $1200 for car repairs. Using an overdraft line of credit at the Bank, you can take money every year on 18% (assuming no compounding, interest paid annually) and to pay 12.50 $overdraft fee. If you want to pay the loan back within a year, you will have to pay a total of $216 in interest, plus $12.50 in fees.
With credit cards you can borrow money at an initial rate of 12% for a period of one year (if not compounding, interest is paid annually), and card no annual fee. You will have to pay 144 $in interest.
In this case the credit card is the best choice.
In addition, an overdraft line of credit, like credit cards, have a fine air. This means that if you miss a payment, your interest rate may increase significantly, so whichever option you choose, be sure to make your payments on time.