If you need to make an important and urgent purchase – such as repairs to get your car through its MOT - but don’t have the money at your disposal to pay for it there and then, borrowing could be an option for you.
As long as you don’t borrow any more than you can afford to pay back. But which form of credit is better, a credit card or an overdraft?
Why a credit card?
With a credit card, you can make a purchase and spread the cost of out over a couple of months.
Using a credit card responsibly and paying the on time every month can help you build up your credit rating.
With 0% interest rate offer cards, you can effectively borrow for free with a credit card, just as long as you clear your balance before the 0% offer period ends.
Thanks to Section 75, you’re covered on any purchases that you make between £100 and £30,000 with a credit card. You can read more about this, here.
Some credit cards come with rewards, like savings points or air miles.
If you don’t pay off your balance in full every month you’ll incur interest charges (unless you’re in a 0% interest period).
If you make just the minimum repayments, your balance could take a while to pay off – that’s why it’s important to always try to pay more than the minimum.
If you’re late making your monthly payment or miss it completely, then you’ll likely to be charged a fee and your credit score may be negatively affected.
You’ll face a penalty charge if you exceed your credit limit.
You may be charged and will pay interest straight away if you use your credit card to withdraw cash from a cashpoint.
You won’t have control over how much your credit limit will be, as this will depend on your credit rating. So if your credit score isn’t in the best condition you may only be accepted for a lower credit limit, which may not be enough for what you want to buy.
What about an overdraft?
With an arranged overdraft, you and your bank agree on the limit that will be set. So you will get a say in how much you would like to borrow.
An overdraft tends to be fairly quick to arrange.
If you manage to pay off your overdraft sooner than expected, you shouldn’t be met with charges.
Like credit cards most overdrafts (even arranged overdrafts) charge daily interest equivalent to APRs of around 15-20%. There may be daily, weekly or monthly overdraft usage fees. It is worth checking though as some banks may provide an interest free overdraft up to a certain limit.
You may be charged when you arrange or extend an overdraft or if you go over your agreed overdraft limit.
You will only be able to get an overdraft from the bank that you have your current account with.
Your bank can take your overdraft away at any time.
So which one?
Ultimately, whether you go for a credit card or an overdraft is up to you. It all depends on what the purpose of your borrowing is, for example if you have an emergency bill that you’ll be able to repay next payday then dipping into your overdraft for a few days could be the right option for you. Whereas if you want to borrow for a longer period of time and spread the cost out, then a credit card may be more suitable.
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Intelligent Lending Ltd (Credit Broker). Capital One is the exclusive lender.