# Arranged overdraft vs credit card — which is cheaper for short-term borrowing?

> Compare · Last reviewed 26 May 2026

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## Quick answer

An arranged overdraft is a credit limit on your current account, charged a single annual rate (often 35–40% EAR) and applied daily. A credit card has a credit limit and charges interest only if you don't clear the balance in full each month.

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Both can plug short gaps, but the cost difference depends on how you use them. Since the FCA's 2020 overdraft reforms, banks must charge a single annual interest rate on overdrafts. Credit cards offer interest-free purchase periods if cleared monthly.

## Arranged overdraft vs Credit card

| Criterion | Arranged overdraft | Credit card |
| --- | --- | --- |
| Charged on | Any negative balance | Any balance not cleared in full by the due date |
| Interest model | Single annual EAR, charged daily | Monthly APR; up to 56 days interest-free on purchases |
| Typical headline rate | 35–40% EAR | 20–30% APR (purchases) |
| Interest-free option | First £X (varies by account) | Yes, if cleared in full each month |
| Cash withdrawal cost | Same as standard overdraft rate | Cash advance fee + immediate interest |
| Section 75 protection | No | Yes, on purchases over £100 up to £30,000 |
| Credit-file impact | Reported as a revolving credit facility; persistent use can be a flag | Reported monthly; utilisation affects credit score |

## When Arranged overdraft suits

- You need a small, very short-term buffer
- Your account includes a fee-free buffer that covers the amount
- You can clear it within days, not months
- You don't want a new credit application

## When Credit card suits

- You can clear the balance in full each month
- You want Section 75 protection on a purchase over £100
- You're using a 0% purchase deal for a planned spend
- You want to avoid persistent overdraft use

## Frequently asked questions

### Why are overdraft rates so high?

Since the FCA's 2020 reforms, banks must charge a single, simple annual interest rate instead of confusing daily fees and tiered charges. Many banks set this in the 35–40% EAR range.

### Does using my overdraft hurt my credit score?

Occasional, repaid use is usually fine. Persistent overdraft use (regularly maxing out, never clearing) is flagged by lenders and can affect future borrowing applications.

### What's the cheapest way to spread a £1,000 cost?

Information only, not advice — but typically a 0% purchase or money-transfer credit card with a fee, or a low-rate personal loan, will be cheaper than running a £1,000 overdraft for several months.

## Sources

- [MoneyHelper — Overdrafts](https://www.moneyhelper.org.uk/en/everyday-money/credit/overdrafts)
- [MoneyHelper — Credit cards](https://www.gov.uk/consumer-protection-rights/credit-cards)
- [GOV.UK — Section 75 of the Consumer Credit Act](https://www.legislation.gov.uk/ukpga/1974/39-1974)

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Independent UK money guidance from [Money Guide](https://moneyguide.org.uk). Money Guide is not a financial adviser and does not currently earn commission on credit cards. This guide is educational information only — always check the issuer's own terms, eligibility checkers and fees before applying. 18+, subject to status. Credit is a commitment: only borrow what you can repay in full each month, because interest charges erase every reward on this page.