Arranged overdraft vs credit card — which is cheaper for short-term borrowing?
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In short. 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.
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.
Last reviewed:
Side by side
Charged on
Arranged overdraft
Any negative balance
Credit card
Any balance not cleared in full by the due date
Interest model
Arranged overdraft
Single annual EAR, charged daily
Credit card
Monthly APR; up to 56 days interest-free on purchases
Typical headline rate
Arranged overdraft
35–40% EAR
Credit card
20–30% APR (purchases)
Interest-free option
Arranged overdraft
First £X (varies by account)
Credit card
Yes, if cleared in full each month
Cash withdrawal cost
Arranged overdraft
Same as standard overdraft rate
Credit card
Cash advance fee + immediate interest
Section 75 protection
Arranged overdraft
No
Credit card
Yes, on purchases over £100 up to £30,000
Credit-file impact
Arranged overdraft
Reported as a revolving credit facility; persistent use can be a flag
Credit card
Reported monthly; utilisation affects credit score
When Arranged overdraft usually wins
- 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 usually wins
- 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
FAQ
- 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.