If you have an overdraft facility, is it worth taking out a credit card too?
Well there may still be a good reason to take out a credit card – and to stop using your overdraft.
How much is your overdraft costing you?
Many current accounts come with an overdraft as standard. Your bank will normally agree this facility when you first open your account. Overdrafts don’t always come free, and you may be charged interest to use yours, or pay a regular fee.
From time to time, your current account provider may even discuss increasing or reducing your spending limit, depending on your needs and financial circumstances. However, it’s important to stay within your authorised overdraft limit.
If you don’t – perhaps because a standing order takes you over your limit or you spend more than you have in your account – the situation can get very expensive, very quickly. You may be charged a fee on every transaction you make while in your unauthorised overdraft, as well as a regular fee for the time you spend over your limit – you may even be charged daily. That’s why it’s of the upmost importance to stay well clear of this limit.
Should I get a credit card instead?
You don’t have to get a credit card to use as well as your overdraft; you could get one to use instead of this facility.
First of all, ask yourself what you’re currently using your overdraft for. For example, no matter how well you budget, an unexpected or emergency cost could crop up that your overdraft allows you to pay for. On the other hand, you might find you’re relying on your overdraft for day-to-day spending.
The thing is, an overdraft could be costing you more than a credit card. If you take out a credit card, providing you clear the balance of your spending in full each month, you won’t be charged interest. On the other hand, if you go into your overdraft you could be charged interest – and if you go over the authorised limit you could face other charges too.
As we said, you should try to avoid going over your overdraft limit. For every day you are in the red, there’s a cost to you. And though there are caps on the number of times they can charge you in a month, it can still be as much as £10 a day. In addition, some banks may also charge you interest.
What can a credit card offer over an overdraft?
A credit card can help you pay for an unexpected cost so you don’t get charged overdraft fees. Yes, a credit card also charges interest, but if you don’t borrow more than you can afford to pay back every month and clear the balance in full, you won’t be charged this.
Other advantages a credit card offers over an overdraft include giving you the ability to build your credit history. If you always make your minimum repayment on time, don’t go over your spending limit and don’t use it to withdraw cash, this can have a positive impact on your credit history. If you use your overdraft responsibly, this will have no impact on your credit history (although if you go over your limit this can have a damaging effect).
A credit card also lets you pay for a one-off purchase and then spread the payments over a few months. By not clearing your balance in full, you will have to pay interest, but this might be a price you’re willing to pay to make the purchase more affordable.
Section 75 is an added bonus of credit cards. It means that any purchases you make between £100 and £30,000 are covered if the product or service you pay for doesn’t arrive, the company supplying it goes bust, or if the product itself arrives damaged.
There is a variety of credit cards out there that offer great rewards like cashback schemes, travel rewards, rewards points and so on, which an overdraft wouldn’t provide.
Ultimately, whether you choose to apply for a credit card is entirely up to you. And we wouldn’t advise you to take one out for unnecessary spending, or just because it’s been offered to you by the lender.
If you are currently living in your overdraft, you should make it a priority to get back into the black. Until you do, every penny you spend is borrowed and if your account provider is charging you to use your overdraft, spending in this way could wind up very expensive.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.