Credit Card Debt vs Overdraft Fees: Know the Costs and Consequences
When it comes to managing your finances, understanding the different types of fees and charges that can impact your budget are important. Credit card debt is the amount of money you owe to your bank when you carry a balance on your card. On the other hand, overdraft fees occur when you spend more money than you have available in your checking account. Overdraft fees are typically associated with checking accounts, often accessed with debit cards. This is why knowing the difference between credit and debit cards is essential. In this guide, we’ll explore the costs and consequences of credit card debt and overdraft fees.Â
Difference Between Credit Card and Debit Card
There are many differences between credit card and debit card which you must know and compare before signing up. They include the following
- Definition: A credit card is a form of payment that provides the user with a pre-approved loan or line of credit, while a debit card is a form of payment that directly deducts money from the user’s bank account.
- Spending Limit: Credit cards have higher spending limits than debit cards, as there is no need to worry about having enough balance in your bank account to make purchases. At the same time, debit cards have very limited spending limits per the customer’s bank balance.
- Interest Rates: Generally, interest rates are applicable on payments made using credit cards if the customer fails to make full payments within the due date. While searching for the best credit card in India, look for one with lower interest rates. However, no such thing happens when one uses a debit card to make any payment.
- Rewards/Cashback: Credit cards provide rewards and cashback to the user for making payments which are usually not applicable on a debit card.
- Credit History: Building a credit history is very important if you want to get large loans in future; therefore, using a credit card can help you build your credit score. But using a debit card will not make any difference to it.Â
- Security Features: Credit cards have stronger security features than debit cards as they use a personal PIN or signature authentication while making transactions.
Cost And Consequences of Credit Card DebtÂ
| Cost | Consequences |
| Interest charges
If you have a credit card due payment, you will be charged interest on that balance. Because credit card interest rates can be high, paying off your balance in full each month is critical to prevent accruing debt and interest costs. |
Damage to credit score
Late payments and excessive credit card debt can harm your credit score. Even with the best credit card in India, it may not be easy to acquire credit in the future. This results in higher interest rates on future loans. |
| Late fees
Failing to make credit card payments on time can result in late fees, quickly building up and making it even more difficult to pay off your balance. |
Potential legal action
Credit card firms may take legal action or use debt collection measures if you fail to pay your credit card debt. |
| Annual feesÂ
Certain credit cards may charge an annual fee to use the card, which can be an additional cost to consider. |
Difficulties getting loans or credit
Credit card debt and late payments can make it difficult to get loans or credit in the future. |
| Over-the-limit fee
You may be charged an over-the-limit fee if you exceed your credit limit on a credit card. Depending on the card issuer, this fee can be as high as 2.50 per cent of the spent amount. |
Collection calls
To collect a bill, credit card firms or debt collectors may call or send letters to your home or workplace, which can be stressful |
Cost And Consequences of Overdraft Fees
| Cost | Consequences |
| Interest charges
You may be charged interest on overdraft balances, which can increase overdraft protection costs. |
Negative impact on credit score
Repeated overdrafts and unpaid overdraft fees can negatively influence your credit score, making it more difficult to acquire credit in the future or resulting in higher interest rates on future loans. |
| Overdraft fee
Overdraft fees on debit cards are often paid when you spend more money than present in your checking account. |
Account closure
Your account may be closed if you consistently overdraw your checking account or fail to return overdraft fees and negative balances. |
| Extended overdraft fees
If your account remains overdrawn for a lengthy period, you may be charged additional fees in addition to the overdraft fee. |
Extra fees
You may be charged additional fees for failed checks, or account maintenance, which can add to your overall financial burden. |
| Premature closure charges
You may be charged a premature closing fee or penalty if you close a fixed deposit or another investment account before maturity. |
Legal action or debt collection
If you do not repay overdraft fees or negative balances, your bank may take legal action or use debt collection tactics to collect the debt. |
Conclusion
Understanding the difference between credit and debit card is essential for making informed financial decisions. Knowing credit card debt consequences and fees can guide you in choosing the best credit card in India. Whereas knowing overdraft fees usually applicable can help you find a suitable debit card provider. With a little research and planning, you can ensure you are using the right payment option for your needs and budget.
