Should a credit card or overdraft tide you over?

Many of us fall short on cash when we are approaching payday. But exactly how you choose to plug the gap can make a world of difference to your pocket.

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Where people plug the gap

Encouragingly, not everyone borrows to make ends meet. According to our research at MoneySupermarket, more than a third (38%) of people dip into their savings when they run out of money, while 29% use an authorised overdraft and 25% rely on their credit cards.

A fifth of people (20%) borrow money from friends or family while 11% take the financial hit by venturing beyond their agreed overdraft. Just 4% of people rely on a payday loan to tide them over. 

The cost of using your overdraft

If you are forced to borrow, however, whether you choose to lean on overdraft or credit card – as well as the type of bank account and plastic you have – could have a big impact on your finances.

For example, if you go overdrawn by £500 with Lloyds TSB’s Classic Account Plus, even just for one day a month, you will pay £5.26 a day in interest, which would equate to £63.12 a year if it happened every month. If you were overdrawn for five days in the run up to payday, this account would charge £6.30 each month, or £75.60 for the year.

If you spend the whole month in the red, you’ll have to be even more cautious about your choice of bank account. Being £500 overdrawn for 30 days in the month with The Halifax Reward Account for example, will cost you £25 a month or £300 in a year.

However, if you are only overdrawn by that amount for one day, you will only pay £1.

The best current accounts

According to our latest research, more than one third of Brits (35%) have used their overdraft in the last 12 months. Of these more than a quarter (27%) ended up overdrawn just 15 days after getting paid, while 7% hit the red zone within five days of payday. Getting the right account in place will therefore really help limit your losses.

So what’s out there?

Santander’s Everyday Current Account is a simple option for those who tend to be overdrawn for much of the time. Unlike the majority of accounts, it imposes no minimum monthly funding threshold (which is the amount you need to pay in to operate the account).

Switchers to the account can also benefit from a 0% fee-free arranged overdraft for the first four months. After this, your overdraft – whatever amount is agreed – will be charged at £1 a day and capped at 20 days for each statement month.

The Co-operative Bank Account Plus offers a longer-term solution on modest overdrafts. It offers 0% interest on borrowing of up to £200 with charges of 15.9% APR thereafter so long as you pay in at least £800 a month. The fact that the Co-operative Bank is also the winner of MoneySupermarket’s Supers award for Best Current Account Provider is also worth knowing.

Alternatively, there’s First Direct’s 1st account which offers 0% on overdrafts up to £250 in return for a higher £1,500 payment in a month. Go beyond £250 and your overdraft rate will also be charged at 15.9% APR. The key attraction with this account is that you can pocket £125 if you switch via MoneySupermarket. You can read more about this in our Focus On, Switch to First Direct and pocket £125.

However, it’s important to note that, because these accounts are all competitive with their overdraft offerings, none offer interest on credit balances. If you change your spending habits one day, you may want to think about switching again.

The cost of leaning on credit cards

When it comes to relying on credit cards in the run-up to payday, the debt can add up if you are carrying the wrong plastic in your pocket. For example, if you spend £500 on a credit card which charges the average APR of 17.31% you would incur interest charges of £6.70 over a month if you only made the minimum repayments. This equates to £75.46 in a year.

However, if it’s likely that you are going to be relying on your plastic, there are ways and means of paying no interest at all. The M&S credit card for example, currently offers 0% on purchases for the first 15 months. But you will need to find a way to clear the balance when this time is up or an APR of 15.9% will kick in. This is lower than average but still a rate that’s worth avoiding.

If you have existing debt on a credit card which is not helping your efforts to avoid being overdrawn, consider transferring the balance to a 0% deal.

Barclaycard’s Platinum Credit Card with Extended Balance Transfer offers 22 months’ interest free on debt transferred to the card as well as three months on purchases.  This is in exchange for a 2.9% fee, and an APR of 17.9% will apply at the end of each 0% deal, so – again – don’t let this catch you out.

Kevin Mountford, head of banking at MoneySupermarket said of the research: “Many consumers are struggling to keep their heads above the water due to the high cost of living and it’s encouraging that a high number of people are able to turn to their savings. However, if you are relying on a credit card or overdraft for back up until pay day, it really does pay to do your research.”

Please note: Any rates or deals mentioned in this article were available at the time of writing. Click on a highlighted product and apply direct.

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