When used smartly, both a credit card and overdraft facility can help tide you over from time to time.
But is one a cheaper way of borrowing than the other?
First, it’s important to understand the difference between an overdraft and credit card to make sure you don’t run into extra charges and fees.
Let’s take a look at both options.
With a credit card, it’s possible to avoid interest and charges, but this all depends on your spending habits and the type of credit card you have. The thing with a credit card is that as long as you pay back the balance in full each month, you won’t pay any additional interest or charges.
And with 0% interest credit cards, as long as you keep up with your minimum payments, you won’t pay any interest on your purchases for a set time. But whether you’ll be accepted for a 0% interest credit card will all depend on your lender and your credit history.
Typically, those who have proven to be responsible with borrowing in the past are the most likely to be accepted for this type of card.
"when used responsibly, a credit card can have a positive impact on your credit history."
But it’s vital you make at least the minimum monthly payment. Not doing this can result in charges from your lender and damage your credit history.
You should aim to clear your full balance if you can, so you don’t have to pay interest. Remember, if you stick to only paying the minimum payment each month, interest can quickly add up, which will increase the time it takes for you to clear your balance.
Another bonus is any purchases you make between £100 and £30,000 are protected – if they develop a fault or they never arrive - under Section 75. Of course, there are rules to what is covered under this type of insurance, and you can read more about it here.
And, when used responsibly, a credit card can have a positive impact on your credit history. It shows lenders that you are able to borrow money and pay it back again on time, without overstretching yourself. This is something lenders look for, so could help when you come to apply for a loan or mortgage in the future.
Often banks offer an overdraft facility on current accounts as standard. When used properly, an overdraft can add a level of flexibility to your finances, and can also be a short-term way of covering your payments and purchases between paydays.
Put simply, an overdraft provides you with a safety net if you spend or withdraw more money than you have in your account. But as with a credit card, there’re pros and cons to borrowing this way.
"It’s worth shopping around and seeing whether some banks offer an interest-free ‘buffer’."
With an arranged overdraft, you’ll be able to spend up to an agreed limit. Once you go over this charge, you’ll be charged fees and interest for dipping into your overdraft. Typically, this could include a usage fee for every day you’re overdrawn.
These charges will ultimately depend on your bank and the amount and duration you’re overdrawn by. Often, the higher the balance, the larger the daily fee. However, these charges are usually capped when you reach a set amount.
It’s worth shopping around and seeing whether some banks offer an interest-free ‘buffer’. This is a small amount, typically between £10 and £25, where you’ll be protected from paying charges and interest if you go overdrawn.
Exceeding your arranged overdraft limit and dipping into an unauthorised overdraft Can not only result in charges, but can also damage your credit history. This may stand against you when you apply for credit in the future.
Not using a credit card responsibly can also have a negative effect on your credit history. But while responsible credit card use can have a positive effect on your credit history, using your overdraft correctly has no such impact.
What does this mean?
Whether a credit card or overdraft would be a more suitable option ultimately depends on your spending habits and the reason you’re borrowing. If, for example, you planned to borrow over a longer period of time, a credit card may be the better option.
On the other hand, if you find yourself short one month by a small amount, dipping into your overdraft may be the easier choice. Just remember that while a credit card can have a positive impact on your credit history as well as a negative one, an overdraft can only affect it negatively.
Like with any type of borrowing, it’s important to weigh up all the pros of cons. That way, you can make the right decision for you.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.