Is There a Difference Between an Overdraft and Revolving Credit?
When you need additional funds for a short period of time, banks offer several solutions that may seem similar at first glance but work in different ways. Two of the most popular products in this category are overdrafts and revolving credit facilities, and many customers find it difficult to understand the difference between them.
Both options provide quick access to funds without requiring you to submit a new application every time you use the approved amount. The difference lies in how you access the funds, how interest is calculated and how flexibly you can manage your payments according to your current needs.
In this article, we take a closer look at both products, their practical applications and the specific situations in which each may be the more suitable choice. This will help you make an informed decision based on your financial needs and circumstances.
What Is an Overdraft?
An overdraft is a form of credit that allows you to withdraw or spend more money than you have available in your current account, up to a pre-approved credit limit. It works as a financial safety net that becomes available automatically when your account balance falls below zero, without requiring a separate request to access the funds.
Interest is charged only on the amount actually used and only for the days during which you use it, rather than on the entire approved credit limit for the full term of the agreement. At iBank, the maximum overdraft amount is EUR 5,000. The approved amount is determined based on up to three net monthly salaries or up to three monthly pension payments. The repayment term is up to 36 months, with the option to extend it repeatedly for subsequent periods of the same duration.
The product carries no fees for credit assessment or risk evaluation. Any portion of the credit limit that you repay becomes available again as soon as the funds are credited to your account, without any waiting period or additional procedure.
The only fee that may apply is a renegotiation fee if you decide to change the terms and conditions of your agreement before its expiry.
What Is Revolving Credit?
Revolving credit is a credit product with an approved limit that you can use repeatedly, provided that you make the agreed repayments regularly. Unlike an overdraft, the funds are not automatically made available in your current account. Instead, you access them by making payments or cash withdrawals with a credit card.
In Bulgaria, a credit card is the most common way to use this type of credit facility, as it allows customers to decide when and how much of their approved credit limit to use. Whenever you repay a certain amount, that amount becomes available again and can be used throughout the revolving period agreed with the Bank.
iBank credit cards, including Visa Classic and Mastercard Standard, offer an interest-free grace period of up to 60 days, provided that the full outstanding balance is repaid within the grace period.
This model gives the Bank better visibility into how you use your funds, reducing the risk from the Bank's perspective. In addition, credit cards offer extra benefits, such as the Cash Back loyalty programme on every purchase and travel insurance for trips abroad, making them attractive beyond their core credit function.
Similarities and Differences Between an Overdraft and Revolving Credit
Both products work in a similar way, as they provide access to an approved credit limit that you can use without going through a new application process. The differences lie in how the funds are accessed, the interest rate policy and the level of risk assumed by both the Bank and you as its customer throughout the term of the agreement.
Similarities
Both overdrafts and revolving credit facilities allow you to access funds repeatedly up to an approved credit limit, without having to apply for a new loan each time you use the available funds during the term of the agreement. With both products, interest is charged only on the amount actually used, offering greater flexibility compared to standard loans with fixed repayment instalments.
Regular and timely repayments restore the available credit limit, allowing you to use the funds again rather than having the credit facility automatically closed after the first withdrawal.
Differences
The main difference between these two types of credit lies in how the funds are accessed.
With an overdraft, the funds become automatically available as soon as your account balance falls below zero. With revolving credit, you must explicitly access the funds by making a cash withdrawal or a payment with your credit card at a POS terminal. With a credit card, all transactions are carried out through card payments, allowing you to track how you use your credit limit and manage your finances more effectively.
Interest rates may also differ. One of the common disadvantages of an overdraft is that it does not offer an interest-free grace period, unlike many credit cards.
When Should You Choose an Overdraft?
An overdraft is a good choice in several specific situations when you need quick access to additional funds in your account.
An overdraft may be suitable for:
- Unexpected expenses - when you suddenly need a small amount of money until your next salary or pension payment, without applying for a separate loan.
- Seasonal income fluctuations - if your work involves variable monthly income and your account occasionally reaches a zero balance before your next payment comes in.
- Covering short-term financial obligations - when you need to make a payment just before receiving a transfer into your account.
- Avoiding the need to manage a separate card - if you prefer to handle all your transactions through the same current account.
An overdraft works best when the need for short-term financing is occasional rather than a regular part of your monthly spending.
When Should You Choose Revolving Credit?
Revolving credit, most commonly available in the form of a credit card, is a suitable option for people who want to keep closer track of their everyday spending.
Revolving credit may be suitable for:
- Regular and planned expenses - when you shop frequently and want to benefit from an interest-free grace period, provided that you make the required repayments on time.
- Additional benefits - if you value advantages such as Cash Back on every transaction or complimentary travel insurance for trips abroad.
- Better repayment planning - when you prefer predictable monthly payments rather than an unpredictable account balance.
- Building a credit history - if you want to demonstrate responsible borrowing and repayment behaviour to the Bank.
The choice between the two products depends on your spending habits, how you use your money and how you prefer to manage your cash flow throughout the month. If you are looking for a standard personal loan with a fixed repayment schedule for a larger amount, the Bank offers other financing solutions, including secured options with lower interest rates.
Before submitting an application, it is worth comparing the credit approval requirements of different financial institutions. This can help you avoid unnecessary borrowing risks and reduce the overall cost of credit in the long term.
When comparing offers, pay attention not only to the nominal interest rate but also to the Annual Percentage Rate of Charge (APRC), as it includes all associated fees and provides a more accurate picture of the total cost of borrowing.
Check the Bank's interest rate bulletin and Tariff of Fees and Commissions before signing an agreement to avoid unexpected costs when using your credit limit in the future. This will give you a clear understanding of how your monthly repayment obligations are calculated and help you plan your budget with confidence.
Frequently Asked Questions
Can I have both an overdraft and a credit card at the same time?
Yes. The two products are not mutually exclusive. Many customers use both simultaneously, provided that their total outstanding credit obligations meet the Bank's lending requirements.
Is default interest charged if I miss a repayment?
In the event of late payment, banks generally charge additional interest on the overdue amount. The exact rate is determined individually according to the relevant Bank's Tariff of Fees and Commissions, so it is advisable to check the applicable terms in advance.
Does the amount of credit I use affect my credit score?
Yes. The extent to which you use your approved credit limit is taken into account when future credit decisions are made. Regular and timely repayments help maintain a good credit history over time.
It is advisable not to use your entire available credit limit on a permanent basis, but to maintain a reasonable available balance. Lenders generally view this positively when conducting subsequent risk assessments.