Manage Money

Credit Card vs Salary OD

Do you know which demographic lenders generally target? They target young salaried borrowers who are facing a temporary financial problem at the end of the month. And this happens more than you think. The thing with salaried individuals is that most don’t budget. And even when they do, expenses pile up suddenly. A vacation here, a family outing here, and medical bills there. All these pile up, and at the end of the month they have a cash crunch. 

However, if you face a similar situation, you have several options: a credit card and a salary overdraft. To take a salary overdraft, there are certain criteria which differ from bank to bank. There are also certain things you need to watch out for before you take out a Bank Overdraft. You can get a loan for all occasions, of which a salary overdraft can save your life if the situation calls for it. It is considered to be the most convenient way to get emergency funds, and thus it is important to know how an OD or Overdraft on salary functions so that you can use one properly.

A salary overdraft is one type of Revolving Credit and, as the name suggests, you can get this money on your salary account. This works like a credit card. Like a credit card, a Salary Overdraft has an upper limit. You can withdraw a certain amount over and over again, provided you repay each time of course. As you can see, this is pretty useful.

Each bank has different parameters for determining the entire extent of such an overdraft. Typically, banks offer a credit line that is 3x of your current net monthly salary. Some banks, though, restrict the same to 80% or 90% of your salary or to their own fixed overdraft limit, whichever of these is lower.

Each bank has different parameters for determining the entire extent of an overdraft.

For example, there are some banks which put a cap on the overdraft at Rs. 3 lakh to Rs. 5 lakh. Others allow a much smaller amount ranging from Rs. 1 lakh to Rs. 1.5 lakh, regardless of how much you earn. There are even banks that give micro loans ranging from Rs. 10000 to Rs. 25000. It all depends on their policies.

As for repayment, this varies from one bank to another too, but most of them give an automatic sweep facility which enables the amount payable to be auto-swept when there is sufficient balance available in the account. Understand that this service is given only to some salary holders depending on their credit history and eligibility factors. To get the OD facility or service, you need to apply through Net Banking. There will be some processing fees, which generally is charged only after the OD is sanctioned. If you want to revolve the credit for more than a year, there is an annual renewal fees.

One thing you should remember is that Overdraft facilities are quite expensive. Whether it is a question of a daily decreasing balance or a simple interest, the average rate of interest is around 1% to 3% a month or 12% to 30% a year! It gets even more expensive if you factor penalties and processing fees.

Unlike a credit card, it does not bring any benefits like reward points or exclusive benefits. Unless you need cash on an emergency basis, it is far better to get or use a credit card instead which at least gives you some benefits and at a much lower cost. With credit cards, you even get an interest-free period each month. This makes a credit card more cost-effective than a Bank Overdraft on salary.

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