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Should I consider a loan, credit card or overdraft?

It depends whether your credit needs are longer-term, or just a short-term fix.

Credit card basics

Depending on the interest rates that apply to your account, a credit card could be a cost-effective way to manage your immediate and longer-term needs, as they evolve over time.

With a credit card you could make purchases, manage unexpected costs, transfer existing balances to consolidate debt and, in some cases, transfer money to your UK current account.

More on credit cards

Personal loan basics

If you’re approved for a loan, the money will be deposited into your chosen UK bank account, ready to use for things like a car purchase, home improvements, or consolidating debts you hold elsewhere.

If the interest rates are fixed your loan repayments will be too, making it easier to understand your borrowing costs and keep track. If interest rates are variable, your repayments and borrowing costs may change over time.

More on personal loans

Overdraft basics

An arranged overdraft acts as a short-term safety net on your current account, whether you need a little extra to cover unplanned expenses, or just to tide you over when you’ve run out of money.

Applying for an arranged overdraft should be simple and, if approved, you’ll only be charged daily interest if you use it. It might not be the cheapest way to borrow, but it’s handy as a short-term solution.

More on overdrafts

If you’re planning to use credit

When you apply, lenders and service providers contact their preferred credit reference agencies to check your credit record, which may highlight any potential risk of offering you credit. This information could also influence any interest rates and the amount of credit offered.

Lenders and other service providers also do their own credit scoring (PDF 69.8kb) when you apply for credit, looking at information from your credit record. They also consider other factors like affordability and past account history.

All lending is subject to an assessment of your circumstances.

With any type of borrowing, fees and interest could apply. To limit these costs, you should only borrow what you can reasonably afford to repay, over the shortest possible term.

More on credit scores

Why choose a credit card?

As well as everyday spending, credit cards are commonly used to fund home improvements, the purchase of a car, to manage emergency expenses and existing debts, or to spread the cost of something like a wedding or holiday.

Credit cards are offered by banks, building societies, other finance companies and even retailers.

When you borrow, you’re making a commitment to manage and repay debt responsibly, accepting that interest, fees and charges might also apply.

What’s good about a credit card?

  • Many lenders offer credit eligibility tools, helping you to find credit cards you’re eligible to apply for, and see an estimated credit limit, without impacting your credit score and record.
  • If you make a full credit card application, you could get an instant decision. Some lenders offer the option to make balance transfers as part of your application, so you can take advantage of your account benefits as soon as your account is set up. Just be aware that transfer fees could apply.
  • You could benefit from low or even 0% interest on credit card transactions if an introductory or promotional rate applies. Just make sure you check the terms and conditions.
  • Credit cards can be used to make purchases, transfers and cash withdrawals, both at home and abroad. It’s just important to remember that interest, fees and charges might apply.
  • You can repay as much as you want each month, or as little as the minimum payment. Just be aware, if you only pay the minimum, it’ll take you longer and cost more to repay your balance.
  • You don’t need to be a homeowner to apply.
  • Where the total purchase price is over £100 and up to £30,000, credit card purchases will usually be covered by Section 75 of the Consumer Credit Act 1974.
  • Some credit cards offer tailored benefits, such as preferential rates for overseas use, or the opportunity to earn cashback on qualifying card purchases.
  • Using and managing a credit card carefully could help to improve your credit score over time.
  • Fraud protection is a standard feature of a credit card.

What are the drawbacks of a credit card?

  • Whether or not you’re accepted, ‘hard’ credit searches could affect your credit score, especially if you make a number of full credit applications in a short time.
  • Personal loans and other credit options could offer lower standard interest rates. The borrowing costs with a credit card reflect the increased risk of offering flexible borrowing.
  • Introductory or promotional interest rates often have restrictions. As an example, you might be offered 0% on balance transfers for a number of months, but only on transactions made within the first 60 days from account opening.
  • Unlike a personal loan, there’s less structure around credit card payments, which could make it harder to budget, especially if you use your card on a regular basis. If you want to repay your balance, you need to be disciplined and avoid making purchases you can’t really afford.
  • When introductory or promotional interest rates expire, the standard interest rates will apply instead, which could increase your borrowing costs on any remaining balances. To avoid this, try to repay your balance before any offers expire.
  • You could be charged different interest rates for each transaction type. Other fees and charges may also apply. To keep your interest costs to a minimum, payments you make are allocated to balances with the highest interest rates first, and to those which appear on your monthly statement before others which will feature on future statements.
  • Carrying a lot of debt could affect your credit score and your ability to get credit in the future.

 

More on credit cards

Why borrow using a personal loan?

Personal loans are commonly used to finance a car, home improvements, or to consolidate existing debt. They’re also a handy way to manage unexpected bills, or to pay for a wedding, celebration or holiday.

You could get a personal loan from a bank, building society and some other finance companies.

Decide how much you’d like to borrow, what you can afford to repay, and then set a term to suit your budget. Personal loans are typically available for 1-7 years.

Why not try a loan calculator to estimate your monthly payments?

When you borrow, you’re making a commitment to manage and repay debt responsibly, accepting that interest, fees and charges might also apply.

What’s good about a personal loan?

  • With unsecured loans, you don’t need to be a homeowner to apply.
  • Some lenders offer a quotation before you apply, helping you to understand if you’re likely to be eligible for a loan, without impacting your credit score and record.
  • If you go on to make a full credit application, you could get an instant lending decision. Funds could even be in your nominated bank account the same day.
  • If your interest rates are fixed, your loan repayments will be too, making it easier to understand your borrowing costs and keep track.
  • The structured nature of a personal loan also means your interest rates could be lower than those on credit cards or overdrafts.
  • On some loans, you might have the option to make overpayments without being charged extra, which could reduce your overall term and borrowing costs.
  • At the end of the loan term everything will be paid off, as long as you’ve made all of the necessary payments.
  • Using and managing a loan carefully could help to improve your credit score over time.

What are the drawbacks of a loan?

  • You might need to be a homeowner to get a secured loan. You could lose whatever the loan is secured against if you don’t keep up with repayments.
  • A personal loan isn’t as flexible as a credit card or overdraft. To borrow more in future, you’d need to apply for an additional credit product.
  • If you choose a personal loan with variable interest rates, your borrowing costs and monthly payments could change over time.
  • Whether or not you’re accepted, ‘hard’ credit searches could affect your credit score, especially if you make a number of full credit applications in a short time.
  • Carrying a lot of debt could affect your credit score and your ability to get credit in future.
  • On some loans, early repayment charges might apply if you want to overpay, or repay your balance early.
  • Purchases made using cash, a debit card or bank transfer won’t be covered by Section 75 of the Consumer Credit Act 1974, unlike some purchases made using a credit card.
More on personal loans

Why choose an overdraft?

An arranged overdraft could be useful as a short-term safety net, helping you to manage unexpected costs, or simply tide you over for a few days.

Some banks and building societies will let you use an unarranged overdraft, but your credit score could be negatively impacted if you do.

You might be able to apply for an arranged overdraft online, over the phone or in branch. You’ll only pay daily interest if you use it.

When you borrow, you’re making a commitment to manage and repay debt responsibly, accepting that interest, fees and charges might also apply.

What’s good about an arranged overdraft?

  • You don’t need to be a homeowner to apply for an arranged overdraft.
  • Arranged overdrafts are available from banks and building societies, on most current accounts, giving you access to a pre-agreed overdraft limit.
  • On some accounts you could have a ‘grace period’, giving you until the end of the day to bring your account back into credit before daily interest charges begin.
  • Get an estimate by using an overdraft cost calculator – try the Halifax version.
  • Your bank or building society could give you an instant decision on an overdraft, giving you access to your overdraft straight away.
  • When you use your overdraft, and how quickly you repay what you borrow, is flexible. Just be aware that the longer you hold a debit balance, and the more it increases, the higher your borrowing costs would be.
  • Using and managing an arranged overdraft carefully could improve your credit score over time.

What are the drawbacks of an arranged overdraft?

  • The interest rates on an overdraft could be higher than those on a credit card or personal loan, especially for long-term borrowing.
  • Overdraft limits are likely to be lower than you’d expect on a credit card or personal loan.
  • Carrying a lot of debt could affect your credit score and your ability to get credit in future.
  • Unlike a personal loan or credit card, there’s no structure around repayments.
  • Purchases made using cash, a debit card or bank transfer won’t be covered by Section 75 of the Consumer Credit Act 1974, unlike some purchases made using a credit card.
  • Your bank or building society could change or cancel your overdraft at any time and may be repayable on demand.
More on overdrafts

Always manage credit carefully

  • It’s important to make payments on time to avoid extra fees and charges, losing any introductory or promotional interest rates, and to limit any negative impact to your credit score or record.
  • Try to repay as much as you can, wherever possible, to reduce your balance and the amount of any interest you pay overall. This could also stop you avoid falling into persistent debt. Just be aware that on some forms of borrowing, early repayment charges may apply.

A summary on credit cards, loans and overdrafts

Do you need something predictable, flexible, or a little credit just to tide you over?

  • A loan is a structured way to borrow over a fixed period of time – typically 1-7 years. Interest rates can either be fixed or variable. At the end of the term everything will be paid off, providing you’ve made all necessary payments.
  • A credit card is a flexible way to manage your credit needs as they change over time, helping you spread the cost of purchases, or to consolidate balances you hold elsewhere.
  • An overdraft on your current account can be used as a short-term safety net, rather than a long-term borrowing option.
  • It’s also useful to remember, other borrowing options might be available, and interest, fees or charges could apply when you use credit.
     

Want to read more?

Applying for credit

How does a credit score work?
How to improve your credit score
What is a good credit score?
Why has my credit score gone down?
What affects your credit score?

Using credit

How to pay for a car
How to pay for a wedding
How to pay for a holiday
How to pay for home improvements

Ways to borrow

Credit cards
Loans
Car finance
Overdrafts
Mortgages

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