Answers · UK 2025/26

Is it cheaper to use an overdraft or a credit card for short-term borrowing?

For most short-term borrowing, a credit card is usually cheaper than an arranged overdraft, since many current accounts charge around 35-40% EAR on overdrafts while a typical purchase credit card charges somewhat less, and paying off a credit card balance in full within its interest-free period costs nothing at all -- overdrafts start charging interest immediately with no equivalent grace period.

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Both arranged overdrafts and credit cards are common ways to cover short-term cash flow gaps, but their cost structures are different enough that the cheaper option depends heavily on how quickly you can repay the borrowing. **How overdraft interest works** Since April 2020, banks have been required to charge a single, simple annual interest rate (EAR) on arranged overdrafts, rather than the old mix of daily fees and different tiers -- typical rates across major high street banks tend to sit in the 35-40% EAR range, applied from the moment you go overdrawn, with no interest-free grace period on the borrowed amount itself. **How credit card interest works** Credit cards typically charge a representative APR that varies by card and your credit profile, and crucially, most standard purchase credit cards offer an interest-free period (commonly up to 56 days, depending on your statement and payment dates) if you pay off your ENTIRE statement balance in full and on time each month -- meaning borrowing on a credit card and clearing it before the interest-free period ends can cost nothing. **Why the comparison flips if you can't repay quickly** If you can't clear the balance in full within the interest-free period, credit card interest starts applying to the outstanding balance, and if you consistently only make minimum payments, the compounding cost of credit card debt can become expensive very quickly given typical purchase APRs -- for genuinely short-term, easily repayable borrowing, credit cards tend to be cheaper; for borrowing that will linger for months, the comparison depends on the specific rates of the products involved. **Unarranged overdrafts -- the most expensive option** Going overdrawn WITHOUT a prior arranged limit (an "unarranged" or "unauthorised" overdraft) can be significantly more expensive and carries a real risk of returned payments, additional fees, and damage to your credit file -- this is generally the most expensive and riskiest form of short-term borrowing and should be avoided wherever possible by arranging a limit in advance if you anticipate needing to dip into an overdraft. **0% purchase or money transfer credit cards** For planned, larger short-term borrowing, a 0% purchase credit card (interest-free on new spending for a promotional period, often many months) or a money transfer card (which moves cash into your bank account, useful for paying down an overdraft, also often at 0% for a promotional period though usually with an upfront transfer fee) can be considerably cheaper than either a standard credit card or an overdraft, provided you have the discipline to clear the balance before the 0% period ends and the interest rate reverts to a standard, often high, rate. **Effect on your credit file** Both overdraft usage and credit card balances appear on your credit file and are considered by lenders when assessing future borrowing applications -- regularly maxing out either can affect your credit score, and lenders may view heavy reliance on either form of short-term credit as a sign of financial strain. **Practical tip** If you can clear the debt within a month or so, a standard credit card's interest-free period usually beats an overdraft's immediate interest charge; for borrowing that will take longer to repay, compare the actual interest rates of a 0% promotional credit card, a personal loan, and your specific overdraft's EAR, since the "cheapest" option genuinely depends on the numbers for your specific accounts.