Credit Card vs Overdraft
It is not uncommon for medical students to require some form of credit to get through their medical studies full of rigorous needs and lack of opportunity to fit some form of work into an extremely busy schedule. Due to the rising rates of youth unemployment, one can expect increasing need for credit; but at times lines of credit can be a risky option. Understanding the different forms of credit will be paramount to drive you to make the right decision for you.
Let’s look at two popular lines of credit for university students which should help you understand what the differences and how each option works.
What is a personal overdraft?
That’s probably the least known option compared to credit cards. Overdraft is an account linked to your regular transaction account in which you are able to overdraw your money. It is considered unsecured debt which allows you to help with cash flow shortfalls.
Banks allow certain limits for customers depending on overall financial position and are mainly charged with a monthly service fee and interest on the amount overdrawn. Overdrafts typically don’t have a repayment period or schedule, it is an option that allows you to just pay it back when you are able too. Although each bank will have different rates of interest, it is generally between 10 and 20% that you would pay in interest as well as daily, weekly or monthly fees until you repay what is owed.
The other fee you typically will incur is an arrangement fee for setting up the overdraft account with your bank.
In summary, the overdraft essentially is an option that will put your bank account into a negative position and to avoid these charges you need to put that account back into positive.
What is a credit card?
A credit card is a card used to essentially borrow money from the bank to make your purchases. It is used with a promise to pay the card issuer back the amounts borrowed along with any possible charges incurred as a result of the purchases made in credit themselves.
Credit cards require you to make repayments each month and usually set minimum monthly repayments depending on the amount of credit and the credit limit you were approved on your card. Most credit cards have an interest free period which allow you to make purchases and pay it back within that period before you are charged interest amounts. The interest on a credit card is typically around the 20% mark so if you don’t believe you can pay the amounts back in full in the given amount of time then it can become an expensive option.
With credit cards, you may also be charged annual fees and cash advances which can also put your back even more.
In summary, a credit card can initially feel like the easy option but seeking advice or doing your own research to understand the consequences and commitments before taking out any particular credit card will be a smart move.
How does it all work with salary packaging for interns?
In regards to salary packaging, final year medical students and later, medical interns, will need to be aware that they are unable to salary package personal overdrafts. As there isn’t a commitment or repayment schedule in place, it isn’t considered a loan or a line of credit that you can salary package.
Therefore, this is something that you personally may want to consider when deciding what line of credit to use as a final year student.
A credit card on the other hand can be used for salary packaging but you do want to ensure that you are able to make the repayments in full in order to avoid large interest charges. Depending on your letter of offer and which hospital you will be going to you may be able to start accumulating expenses on the credit card prior to starting work which essentially allows you to maximise your spending caps and creates a greater saving during your internship year.
To find out more about salary packaging and what might work best for you now in your final year and when you start your internship next year, seek advice from a medically inclined accountant or advisor.
Our tax team at DPM specialises in medical financial advice and can help you make this process easier, simply book in a no-obligation initial consultation with one of our tax specialists to receive all the information you need to help you understand what salary packaging is, how to make the most of it and how to get started.
You may also find the following articles helpful with understanding salary packaging:
- Preparation is key with Salary Packaging – Why you should act early
- Salary packaging and reportable fringe benefits – How they are calculated
- Top 5 tips for Salary Packaging in your intern year
Disclaimer: * The information contained in this site is general and is not intended to serve as advice. DPM Financial Services Group recommends you obtain advice concerning specific matters before making a decision.