Overdraft vs. Credit card: which is best?

Trying to decide between an overdraft and a credit card? Let's break down the differences to help you figure out which one might be best for you.

What is an overdraft?

An arranged overdraft is a facility linked to your current account that allows you to spend more money than you have in your account, up to an agreed limit.

An unauthorised overdraft is when you have spent more money than is in your current account or gone over your authorised overdraft limit.

Many current accounts come with an overdraft as standard. Your bank will normally agree to 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.

How much could an overdraft cost you?

In the overdraft vs. credit card comparison, overdrafts can come out quite costly.

If you go over your authorised limit, perhaps because a standing order takes you over your limit or you spend more than you have in your account, fees can add up quickly, making it very expensive. Your bank might also adjust your spending limit based on your financial situation.

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.

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.

That’s why it’s so important to stay clear of this limit.

What is a credit card?

A credit card allows you to borrow money up to a certain limit to make purchases and spread the cost of items. You’ll receive a monthly statement showing what you’ve spent and the minimum amount how much you need to repay.

Both overdrafts and credit cards can be expensive if not managed carefully. Overdrafts may charge daily or monthly fees, and interest can add up if you exceed your limit. However, some credit cards have much higher interest rates (often 39% APR or more), meaning they can be even costlier if you carry a balance. The key is understanding the charges and choosing the most affordable option for your situation.

Unlike an overdraft, credit cards can help build your credit history if used responsibly. Overdrafts, on the other hand, won’t improve your credit score—unless you go over your limit, in which case they could harm it.

Should I get a credit card instead?

You don’t have to use a credit card alongside an overdraft; you could use it instead.

Think about what you might use an overdraft for. Is it for emergencies or day-to-day spending? An overdraft might cost you more than a credit card.

If you clear your credit card balance every month, you won’t pay interest. But with an overdraft, you might be charged interest and other fees if you exceed your limit. You might also be charged when you're using an arranged overdraft.

Comparing overdrafts vs. credit cards

Feature	Overdraft	Credit Card
What it is	Extra money you can borrow from your bank account when you run out of funds.	A card that lets you borrow money to make purchases, which you pay back later.
Best For	Short-term borrowing, like covering unexpected expenses.	Larger purchases, short-term borrowing and spreading the cost over time, or earning rewards.
Fees	Some banks charge daily or monthly fees.	May have annual fees, late payment fees, or balance transfer fees.
Repayment	No set repayment schedule, but interest adds up quickly.	Monthly payments required, with a minimum amount due each month.
Credit Impact	Can hurt your credit score if you go over your limit or miss payments.	Can build credit if used responsibly, but missed payments can hurt your score.

What can a credit card offer over an overdraft?

A credit card can help you avoid overdraft fees for unexpected costs. While credit cards charge interest, you won’t pay it if you clear your balance monthly. Plus, credit cards can help build your credit history if used responsibly, by paying on time, and staying well within your credit limit.

Credit cards also let you spread payments for big purchases over a few months. You’ll pay interest if you don’t clear the balance, but it can make purchases more affordable. Another perk is Section 75 protection, covering purchases between £100 and £30,000 if something goes wrong.

Credit cards can also offer rewards like cashback, travel points, and more, which overdrafts don’t.

Ultimately, whether you get a credit card is up to you. Don’t get one for unnecessary spending or just because it’s offered. If you’re living in your overdraft, focus on getting back in the black. Overdraft fees can add up, making it an expensive way to spend.