How do an overdraft and a credit card work?

How does an overdraft and a credit card work? An unexpected expense can easily complicate your life, but if you have a reasonable understanding of finance, you can easily deal with it. The choice of a suitable credit product depends on your financial flexibility. If you are confident in your ability to repay the debt within a relatively short timeframe, setting up a credit card or overdraft is an ideal solution. Do you know what the difference is between them?

What is an overdraft?

An overdraft (overdraft facility) means an authorised overdraft of funds on a current account. You must have this service authorised and agreed in writing by the bank.

An overdraft serves you well as an effective small reserve during a short-term shortage of funds. But beware, the bank will not provide it for free and at the same time decides on the authorised overdraft limit. It is ideal to have an emergency fund for your finances amounting to 20,000 to 30,000 CZK (about 920 to 1,400 USD).

How does an overdraft work?

An overdraft operates on the principle of an authorised debit overdraft (its amount is agreed and approved by your bank), which you can draw repeatedly and at any time. Its indisputable advantage is free establishment and free choice in its use.

When drawing repeatedly, you do not need to contact the bank with a loan request, which is certainly its advantage over a standard consumer loan.

It is an interest-free loan, but unlike a standard consumer loan, it is subject to a higher interest rate.

As for interest rates, they are automatically applied from the first day of drawdown. However, with an overdraft, you can expect lower interest rates than with a credit card. You can even use it to withdraw money from an ATM without fees.

Disadvantages of an overdraft:

• Unlike a credit card, you lose the opportunity to use a period of interest-free credit.
• The bank can continuously change the interest rate or require full repayment of the outstanding amount by a certain date.
• This is a credit product that can lower your credit rating and prevent you from accessing other loans, or for example, complicate the refinancing of a mortgage.
• It usually does not offer cashback or the possibility of discounts with partner retailers.
• To arrange it, you must be a client of the bank.

💡 Tip: Also read the article that will give you valuable information on how to deal with an adverse financial situation: 10 tips on how to get out of debt

How to increase the limit on your credit account?

This is another service of the banking sector that you, as a client, must discuss with your home bank. The bank will assess your current financial capabilities, credit history and decide whether you are eligible for an increase in your overdraft or not. In addition to providing an overdraft, the bank may also suggest another solution.

If you actively use mobile and internet banking, you can apply for an increase online. Communicating with your bank through an electronic ID card (eObčanka), bank identity (bankovní identita) is becoming increasingly attractive. For example, Air Bank clients can choose between visiting a branch and sending their application from home.

After logging into your account, you enter the details of the desired increase, update your financial information, and submit a request for assessment through the system. The General Financial Directorate (Generální finanční ředitelství, GFŘ) will assess the request and inform the client of the result through an online environment.

How to cancel an overdraft?

Like with other consumer loans, you must amortise the entire borrowed amount. If you need funds, or are even considering borrowing a larger sum, pay off your overdraft and replace it with another type of loan. A classic consumer loan or consolidation of multiple loans will certainly be more advantageous for you.

To cancel your overdraft, which no longer suits you, you must visit a bank branch and inform them of the need to cancel it. However, be aware that the bank may charge you a processing fee for cancelling the overdraft. Therefore, it is important to consider its establishment carefully.

Clients of Air Bank who actively use internet and mobile banking can even deactivate their overdraft themselves through the banking app.

💡 Tip: Also pay attention to the article regarding borrowing funds from non-bank institutions: How to get rid of unfair non-bank loans?

What is a credit card?

A credit card is a credit product that, like an overdraft, lends you funds agreed with the bank. It is quite an interesting financial product, but you must first learn to use it effectively. Otherwise, using a credit card will become expensive and you can easily get into debt.

A credit card is generally not linked to your current account. This is one of its undeniable advantages. In the event of loss, no one will gain access to your personal account.

What do current credit cards offer? You can draw and repay the loan on the credit card and also get certain customer benefits by obtaining it.

Kreditka Poštovní spořitelny

This credit card will provide you with an interest-free period of 55 days, extended warranty for 1 year on selected products, a discount of 0.40 CZK (about 0.018 USD) per litre of petrol purchased at EuroOil, account maintenance is obtained free of charge with a monthly turnover of at least 3000 CZK (about 140 USD).

Another advantage is insurance for goods purchased with the credit card against theft or damage for a period of 6 months completely free of charge. The most interesting benefit is undoubtedly the possibility of trying out the credit card’s functionality free for the first six months.

Kreditka České spořitelny

This product will also offer you an interest-free period of 55 days. If you pay at least 3000 CZK (about 140 USD) per month through the credit card, you can have it managed completely free of charge. Otherwise, the bank will charge you a fee of 50 CZK (about 2.3 USD).

The ČS Credit Card offers the possibility of receiving cashback of 1 % on every payment (but a maximum of 350 CZK (about 16 USD) per month) for payments made via the internet or abroad. Alternatively, you can apply discounts with participating merchants.

mCredit Card

It works with an interest-free period of 54 days with the possibility of automatic 100 % repayment. If you are a new customer, you do not have to pay for credit card management for the first 3 months (after this period, the fee is 29 CZK (about 1.3 USD)/month).

If you withdraw at least 1500 CZK (about 69 USD) from an ATM, withdrawals are free of charge both domestically and abroad. In addition, you can be rewarded for paying with a credit card as part of the Můj Mastercard program. The interest rate (outside the interest-free period) on the credit card is around 24 %.

What are the disadvantages of a credit card?

A clear disadvantage is higher interest rates if you cannot repay borrowed money within the interest-free period. The credit card from Česká spořitelna will charge a penalty of 10 CZK (about 0.46 USD) daily for every 500 CZK (about 23 USD) borrowed.

Interest rates on credit cards range from 4.19% to 36% (source Ušetřeno.cz). If you want to choose the right one, compare offers and, above all, clarify how you will use the credit card and what you expect from it.

The interest rate is a guide, but also monitor other parameters. The Pure Plus Small Bussiness credit card from Diners Club offers a great interest rate of 4.19%, but you will pay an annual fee of 490 CZK (about 22 USD) for its management.

The minimum credit limit is 30,000 CZK (about 1,400 USD). It also offers other services such as travel insurance and preferential services from other contracted business partners.

Clients must decide whether to use a credit card or prefer an overdraft facility. In both cases, these are credit products, so it is essential to carefully assess whether they are necessary and how you will manage them when acquiring them.

A credit card is excellent for online payments. If you have a regular income, you can easily use its interest-free period and also gain other interesting benefits (discount on home insurance, discount when arranging term life insurance and more). You just need to strictly adhere to the set deadlines.

An overdraft facility allows you to have standing orders paid even if your employer sends your salary later. However, you must calculate that the bank will take something for this service.