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Credit Card vs Overdraft - which is best?

Fri 14 August 2020

Credit Card vs Overdraft - which is best?

Making an informed choice when you’re borrowing money can make your debt easier to manage, potentially improve your credit rating and save you cash.

So in what circumstances should you use a credit card and when should you use a bank overdraft?

The best loans for you

We all have questions about finance:

‘Should I get a credit card?’

‘What is an overdraft?’

Perhaps you need to have the basics of credit cards explained?

Not a problem. Here’s a rundown of the key differences...

Credit cards explained

A credit card lets you spend money on credit, and make monthly repayments to pay it back over time. People usually use them for short-term borrowing, and cards often have credit limits of between £1,000 and £5,000.

These are ideal for everyday spending or spreading the cost of big purchases over several months or years.

What is an overdraft?

Essentially an overdraft allows you to borrow money from your bank by creating a negative balance on your account. For instance, if there’s no cash left in your account and you spend £50, your balance would be -£50.

This means you’re using an overdraft.

Remember that interest, charges and fees are applied to both forms of borrowing.

Why do you need to borrow money?

Everyone’s circumstances are different, but in general credit cards are used for everyday planned expenses that you can pay off overtime

If you consider it as a loan, overdrafts are often the best loans for emergencies and unforeseen costs, or as a short-term way of covering payments and purchases until payday.

How quickly do you need money?

It can take anything up to two weeks between applying for a new credit card and receiving it, so if you need access to funds quickly, this may not be the best loan option.

An authorised bank overdraft can often be set up in a matter of hours if you apply online.

But if you have a poor credit history you may need to send extra information, which could delay matters.

If you are searching for bad credit loans, you could opt for a direct lender to help you with unexpected expenses.

How long do you want to pay it back over?

All credit cards have a minimum monthly repayment, but have no end date by which the full amount must be repaid.

Overdrafts also have no set repayment date but can be withdrawn by your bank -  so it is best not to rely on an overdraft as a regular source of cash.

Should I get a credit card?

Pros

  • If used responsibly, a credit card may be positive for your credit rating, as it shows money lenders that you can regularly borrow and make repayments on time
  • Some providers offer low-interest introductory offers
  • Credit limits can potentially be increased
  • Flexible repayments

Cons

  • Withdrawing cash can be very expensive
  • Lower credit limits initially
  • Can take weeks before it’s ready to use
  • Interest added to your bill every month

Should I use my overdraft?

Pros

  • Suitable for unexpected short-term borrowing
  • Cheaper and easy to withdraw cash
  • Quick and easy to arrange

Cons

  • Smaller amount of credit available
  • Interest fees can be high
  • Can be cancelled by provider

Alternatively, if credit cards or overdrafts don’t suit your circumstances and you are currently searching for bad credit loans, you could also opt for a direct lender who could help you access the funds you need.

So, now you’ve worked out what is an overdraft and had credit cards explained, you can weigh up the pros and cons and decide which are the best loans for you.

Should I get a credit card? The choice is yours.

Representative 466.37%APR. Morses Club specialise in small loans to help with unexpected expenses. Our loans aren’t right for everyone, and you should only borrow what you can afford to pay back. If you would like to find out if a Morses Club cash loan is right for you, read our FAQs for more information.

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