Is a Credit Card Better Than an Overdraft?

There are lots of different ways to borrow and some can be quite similar which means that it can tricky choosing between them. An example of this is an overdraft and credit card and it is worth thinking about the similarities and differences so that you can choose the best one for you to use.

Similarities Between Credit Cards and Overdrafts

With both an overdraft and credit card you will need to have them arranged beforehand and then they will be ready to use when you need them. This means that they can be handy to use in emergencies as you will have the money available and ready to use. Neither also have to be repaid within a time limit or at regular intervals although the repayment methods differ greatly. Both have relatively high interest rates although these will differ between providers. Both will need the borrower to have a reasonably good credit score. 

Differences Between Credit Cards and Overdrafts

Credit cards can be used to buy goods and services. They are used instead of cash in shops and also online too. They can also be used to withdraw cash and to buy things abroad, but there are often high charges for this. An overdraft is will enable you to access more money through your current account which means that you can use it by transferring it, drawing out the cash or using your debit card or even writing a cheque.

With an overdraft you will repay the outstanding balance when money goes into your current account. Therefore, when you next get paid something, it will repay it. You will be charged interest for the amount of days that you are overdrawn. With a credit card you will be sent a monthly bill. You will not have to pay interest immediately, but if you do not pay what is owed by a certain date, then you will be charged interest. This means that you get a bit of interest free credit. You also have a choice of repaying everything you have spent on the card and paying no interest, paying a minimum amount which covers the interest and just a little bit more money or repaying an amount in between.

Which is Better?

It will depend on how you want to use the money as to which is better. The fact that you get some interest free credit with a credit card can be really handy, but if you need cash, then you will be charged interest immediately on a credit card, which means that an overdraft might be better if it has a lower interest rate than the credit card that you have. It is worth checking the interest rates too as you may find that the interest charged for cash withdrawals on a credit card might be different to their normal rate or there may be charges as well.

Some people have both and then they will be able to use the one that they feel will work the best for them. However, you will need to be careful of this. If you have access to lots of credit, then it could make it harder for you to be able to keep track of your spending as well as being able to repay it. So you need to be aware of this and think about whether you are likely to be able to cope well with this or whether you will be tempted to spend lots of money because you can and this could mean that you will have to pay out a lot of interest and you may not manage to repay what you owe very quickly.