Updated: Apr 20
Credit and overdrafts are both forms of borrowing. They’re both forms of money that to put it frankly, aren’t yours. But what’s the difference between the two?
Credit: The ability of a customer to obtain goods or services before payment, based on the trust that payment will be made in the future.
Overdraft: A flexible borrowing facility which allows you to withdraw a set amount from a bank account when your actual balance goes below zero.
Play your cards right with credit (no pun intended) and you can avoid a lot interest and charges, if you pay the balance back on time and adjust your spending habits. Nailing the payback of credit shows lenders that you are able to borrow money and pay it back again on time without overstretching yourself
With an arranged overdraft, you’ll be able to spend up to an agreed limit. Once you go over this charge, you’ll be charged fees and interest for dipping into your overdraft. The good news is, new regulation coming in this year will introduce overdraft charge caps so banks can‘t charge you excessive amounts.
Although you must make the minimum payment every month, you can overpay your monthly credit by as little or large as you want.
We like to think as overdraft payments as vacuums, as soon as your wage or sum of money enters your account, it will get used immediately to pay off your overdraft.
Any purchases you make on credit between £100 and £30,000 are protected – if they develop a fault or they never arrive - under Section 75, it’s a-okay! This is why it’s great to purachse your holidays via a credit card.
The majority of overdrafts offer no protection.
Length of borrowing
An overdraft is short term, whereas a credit card can be used for longer term, lengthier purchases.