Credit cards and overdrafts both cover short-term gaps, but their costs differ sharply. This article compares interest rates, fees and the FCA's overdraft reforms so you can see which option may suit your situation.
This article provides general information only. It is not financial advice, and it does not take into account your personal circumstances. Before borrowing, you may want to consider speaking to a suitably qualified financial adviser.
If you are already struggling with overdraft debt, free and impartial advice is available from MoneyHelper on 0800 138 7777.
Which is cheaper: the short answer
It depends on how you use it and how quickly you repay. For a short, defined spend that you can clear in full, a 0% purchase credit card is typically cheaper than an overdraft. For very small or very brief shortfalls, an arranged overdraft may involve less friction. The FCA's 2020 overdraft reforms changed the comparison considerably, pulling overdraft rates up for some users and making them more transparent for all.
How the FCA's overdraft reforms changed the picture
Before April 2020, overdraft costs varied significantly. Banks could charge daily fees, fixed penalties and tiered rates that were hard to compare. The FCA required banks to scrap that structure.
What changed: banks must now charge a single annual interest rate for both arranged and unarranged overdrafts. Daily and monthly fees are no longer permitted.
Why it matters: the change made overdraft costs easier to compare with credit cards and other borrowing, that was the FCA's stated aim. It also pushed many banks to set their overdraft rate at around 39.9% EAR (effective annual rate), which is broadly similar to standard credit card purchase rates.
For some customers, especially those who had previously used unarranged overdrafts, the reform reduced costs. For others, those who had enjoyed low arranged overdraft rates, costs rose.
At the time of writing, the FCA continues to monitor overdraft pricing following the reforms. The specific rate your bank charges is worth checking directly with them.
What does it actually cost? A worked example
To make the comparison concrete, consider borrowing £500 and repaying it after 60 days, then after 90 days.
Assumptions used:
- Overdraft at 39.9% EAR (a rate commonly set by major UK banks following the FCA's 2020 reforms)
- 0% purchase credit card with a promotional period of at least 90 days
- Standard-rate credit card at 24.9% APR (a mid-market representative rate)
Interest is calculated on a simple daily basis for illustration. Actual charges depend on your provider's compounding method.
| Scenario | 60 days | 90 days |
|---|---|---|
| Overdraft at 39.9% EAR | ~£32 | ~£49 |
| 0% purchase card (cleared within promo period) | £0 | £0 |
| Standard credit card at 24.9% APR | ~£20 | ~£30 |
How the overdraft figure is derived: 39.9% EAR equates to a daily rate of approximately 0.0939%. On £500, that is roughly £0.47 per day, giving approximately £28 over 60 days and £42 over 90 days on a simple basis. Compound daily accrual pushes the figures slightly higher, to around £32 and £49 respectively.
What this shows: a 0% card costs nothing if you repay within the promotional window. A standard-rate card costs noticeably less than a 39.9% overdraft over the same period. The overdraft is most competitive only when the amount is very small, the period is very short, or no card is available to you.
These figures are illustrative. Your actual cost will depend on your provider's rate, how interest is compounded, and when you repay.
Side-by-side comparison
| Feature | Credit card | Arranged overdraft |
|---|---|---|
| Typical interest rate | 0% on purchase cards (promotional period); ~20, 30% APR standard rate | ~20, 40% EAR; many banks set ~39.9% EAR |
| Interest-free option | Yes, if balance cleared in full by due date | Varies; some banks offer a small interest-free buffer |
| Fee structure | Possible annual fee; late-payment fee; cash advance fees | No daily fees post-FCA reform; single rate applies |
| Borrowing limit | Set credit limit; may take weeks to arrange | Linked to your current account; may be available faster |
| Access | Requires application and approval | Often pre-arranged with current account |
| Credit-building potential | Yes, if used and repaid consistently | Limited; less consistently reported as positive indicator |
| Repayment flexibility | Minimum monthly payment required; full balance avoids interest | Balance reduces as you pay in; no fixed monthly minimum |
| Eligibility check | Hard search on application (soft search available for eligibility) | Bank reviews your account history |
Key point: the table reflects typical conditions at the time of drafting. Rates and terms vary significantly between providers. Comparing the specific rates on any card or overdraft you are considering is an important step before borrowing.
When a credit card may cost less
A credit card tends to be cheaper in these circumstances:
You can repay within a 0% promotional period. Many credit cards offer 0% on purchases for an introductory period, often three to twelve months. If you can clear the balance before that period ends, you pay no interest at all. An overdraft offers no equivalent.
You spend a predictable amount. Credit cards work well for a defined cost, a car repair, a household appliance, where you know roughly what you will spend and roughly when you can repay. The discipline of a statement and a due date can also help you stay on track.
You want a credit-building tool. Using a credit card regularly and repaying it in full is a recognised method of demonstrating responsible borrowing to credit reference agencies. An overdraft used within its limit does appear on your credit file, but the positive effect on your credit history is generally less consistent.
You want purchase protection. Credit card purchases between £100 and £30,000 may be protected under Section 75 of the Consumer Credit Act 1974 (see MoneyHelper's Section 75 guidance for more detail). Overdraft spending does not carry this protection.
When an overdraft may cost less or be more convenient
An overdraft has its advantages in specific situations:
Very small, very short gaps. If your account is temporarily short by a small amount and you will be paid within days, the interest cost on an overdraft may be negligible, less than the effort of applying for new credit.
You already have an arranged facility. If an overdraft is already in place, using it involves no new application, no hard search on your credit file, and no delay. For an unexpected cost that you can clear quickly, this may be a practical option.
No 0% card is available to you. If your credit history limits your access to promotional-rate credit cards, comparing the standard rate on a card against your overdraft rate becomes important. In some cases the rates are similar; in others the overdraft may be lower.
Credit unions may offer a lower-cost alternative. If you are a member of a credit union, or eligible to join one, credit union loans typically carry lower rates than either a standard overdraft or a standard-rate credit card. The Association of British Credit Unions (ABCUL) has a tool to help you find a credit union you may be eligible to join.
What to check before you borrow
Your exact overdraft rate. Log in to your bank account or call your bank to confirm the annual interest rate on your overdraft. Do not assume it is at the lower end of the market.
Whether a 0% card is available. Many credit card providers offer a soft-search eligibility checker. This lets you see your likelihood of being accepted before formally applying, with no impact on your credit file.
The total cost of borrowing. Use a loan repayment calculator to estimate what each option will cost over the time you expect to hold the balance. Short periods often favour the overdraft on convenience; longer periods often favour the card on cost.
Your repayment plan. The lower cost of a 0% credit card only holds if you repay within the promotional period. If you are unlikely to do that, factor in the standard rate the card will revert to. For overdrafts, check whether your bank offers any buffer or whether interest starts from day one.
Your credit file. Both forms of borrowing appear on your credit file. MoneyHelper has guidance on checking your file with the three main credit reference agencies at moneyhelper.org.uk.
FAQ
Which is cheaper for a one-off short-term cost: a credit card or an overdraft?
A 0% purchase credit card is usually cheaper for a defined short-term cost, because no interest accrues if you clear the balance before the promotional period ends. An arranged overdraft now carries a single annual interest rate under FCA rules, which can reach around 39.9% EAR, so the card typically wins on cost, provided you repay on time.
What did the FCA change about overdraft pricing?
In April 2020, the FCA required banks to replace daily fees and fixed charges with a single annual interest rate for arranged overdrafts. The aim was to make overdraft costs easier to compare with other borrowing. Many banks subsequently set their rate at around 39.9% EAR, though rates vary by provider.
Can using a credit card help build my credit score?
It can, if you use it regularly and repay the full balance each month. This demonstrates responsible credit management to lenders. An overdraft used within its agreed limit can also reflect positively, but the credit-building effect is generally more consistent with a credit card used and repaid regularly.
Does applying for a credit card affect my credit file?
A full application triggers a hard search on your credit file, which is visible to other lenders and may affect your credit score temporarily. Many lenders offer an eligibility checker using a soft search, which does not leave a mark. It is worth using the soft search first before applying formally.
What if I am already in my overdraft and struggling to get out?
If you feel stuck in your overdraft, it can help to contact your bank and ask about a repayment plan, or compare whether a low-rate personal loan would cost less overall. Free, impartial advice is available from MoneyHelper on 0800 138 7777.
Is an unarranged overdraft more expensive than an arranged one?
Since the FCA's 2020 reforms, banks must charge the same annual interest rate for both arranged and unarranged overdrafts. Before the reforms, unarranged fees could be much higher. However, going beyond your arranged limit may still incur additional consequences, such as returned payments, so it is worth staying within any agreed limit.
Related guides
- For a broader look at how credit cards work, see the credit cards guide.
- For help understanding interest rates across different loan products, see the loan interest rates guide.
- For an overview of personal loan options, see the personal loans guide.
Sources
- FCA, PS19/16: Overdraft pricing and competition remedies (Policy Statement, July 2019): fca.org.uk/publications/policy-statements/ps19-16-overdraft-pricing-competition-remedies. Last checked June 2025.
- FCA, Overdrafts (consumer information page): fca.org.uk/consumers/overdrafts. Last checked June 2025.
- MoneyHelper, Overdrafts explained: moneyhelper.org.uk/en/everyday-money/credit/overdrafts-explained. Last checked June 2025.
- MoneyHelper, How credit cards work: moneyhelper.org.uk/en/everyday-money/credit/how-credit-cards-work. Last checked June 2025.
- MoneyHelper, Section 75 of the Consumer Credit Act: moneyhelper.org.uk/en/everyday-money/credit/section-75-of-the-consumer-credit-act. Last checked June 2025.
- Which is cheaper for a one-off short-term cost: a credit card or an overdraft?
A 0% purchase credit card is usually cheaper for a defined short-term cost, because no interest accrues if you clear the balance before the promotional period ends. An arranged overdraft now carries a single annual interest rate under FCA rules, which can reach around 39.9% EAR, so the card typically wins on cost — provided you repay on time.
- What did the FCA change about overdraft pricing?
In April 2020, the FCA required banks to replace daily fees and fixed charges with a single annual interest rate for arranged overdrafts. The aim was to make overdraft costs easier to compare with other borrowing. Many banks subsequently set their rate at around 39.9% EAR, though rates vary by provider.
- Can using a credit card help build my credit score?
It can, if you use it regularly and repay the full balance each month. This demonstrates responsible credit management to lenders. An overdraft used within its agreed limit can also reflect positively, but the credit-building effect is generally more consistent with a credit card used and repaid regularly.
- Does applying for a credit card affect my credit file?
A full application triggers a hard search on your credit file, which is visible to other lenders and may affect your credit score temporarily. Many lenders offer an eligibility checker using a soft search, which does not leave a mark. It is worth using the soft search first before applying formally.
- What if I am already in my overdraft and struggling to get out?
If you feel stuck in your overdraft, it can help to contact your bank and ask about a repayment plan, or compare whether a low-rate personal loan would cost less overall. Free, impartial advice is available from MoneyHelper on 0800 138 7777.
- Is an unarranged overdraft more expensive than an arranged one?
Since the FCA's 2020 reforms, banks must charge the same annual interest rate for both arranged and unarranged overdrafts. Before the reforms, unarranged fees could be much higher. However, going beyond your arranged limit may still incur additional consequences, such as returned payments, so it is worth staying within any agreed limit.