Many people have relied on credit to manage unexpected cashflow shortfall throughout the pandemic. As we start to return to a more normal way of life, knowing when to use credit can be more difficult as financial and personal circumstances have changed over the last eighteen months. For example, you may have been placed on furlough, reducing your income to 80% or you may have taken on more hours and in turn received a pay increase. Even if your financial situation changes for the better, money management can still require a significant amount of effort, and the accessibility to new types of credit can be confusing.
Maybe you are intending on expanding your understanding of the alternative credit options on the market at the moment. Or perhaps your circumstances have changed and you’re comparing new ways to borrow with your existing options. Whatever the reason, it’s always important to research new credit facilities before applying, so that you fully understand the terms and conditions and so that you know you are making a responsible decision.
While there are plenty of ways to borrow money, not every type of loan or running account credit is suited to every circumstance and financial position. For example, you wouldn’t use a personal bank loan to buy a house, but you may use one to renovate or extend your existing property. The purpose of credit plays a big role in determining its suitability.
Overdrafts are a very common way for people to manage their daily cashflow, but they are not the only option for those who want access to a credit facility with flexible repayments and easy use. Overdrafts are extensions to your available bank balance as they allow you to spend more money than you have in your account. Because they are an attachment to your current account, overdrafts are probably the quickest and easiest type of credit to use. However, they can encourage accidental overspending and tempt some people to live outside their means. This is a potential problem with all revolving credit, but with overdrafts you can unknowingly spend the credit — for example, if you have had an unexpectedly high bill debited from your account, you may not realise that your following payments are coming out of your overdraft instead of your own money. This is where credit lines can be a reasonable alternative because while remaining easy to access, there are additional steps involved in withdrawing the credit that mean you are conscious of the amount you are spending, and you are actively intending to spend it.
Credit lines are also revolving lines of credit. This means you can withdraw the credit (up to your credit limit) and repay the funds as many times as you need to maintain cashflow. A credit line requires a separate online account with the credit line provider, from which you can withdraw funds directly into your bank account. It takes less than a couple of minutes from logging into your account to receiving the funds in your bank account, so credit lines still provide super-fast access to cash, while reducing the chances of accidental overspending. Unlike overdrafts however, credit lines charge transaction fees. At Polar Credit, this is 1.65% of the amount you withdraw, not of the total credit limit. This means you could have a credit limit of £500, but if you only withdraw a total of £100 throughout your statement period, your transaction fee will be £1.65. Credit lines cost more than 0% interest overdrafts but are similarly priced to fee charging overdrafts.
If you’re looking for the best revolving line of credit, you will need to review your own personal and financial circumstances first. Unfortunately, there is no one-size-fits-all policy when it comes to credit. If you know you can be tempted to overspend, then a different type of credit like a loan with a fixed duration might be a more sensible option than a running account credit facility. But, if your issue is more financial oversight – for example if you think you have £50 in your bank account, but your available balance is actually £30, then a large payment would decline if you don't have an overdraft set up. You can then withdraw funds from your credit line to meet the payment and know that you need to readjust your budget to manage the rest of the month on your available balance. With an arranged overdraft in place, that £50 purchase would go through, and you might be none-the-wiser to your current financial situation.
If you frequently check your online banking or use mobile banking, you are less likely to spend your overdraft without realising, so the above becomes less of problem. You might find an overdraft is more than sufficient for your credit needs, though you should regularly check the market in case you could be accessing cheaper credit or in case there is a more suitable borrowing option available that you haven't previously considered.
If you’re looking to get a small loan with bad credit, overdrafts and credit lines could be a reasonable alternative, especially if you need regular help managing your cashflow where your paydays don’t align with your bill dates, for example. Credit lines tend to have higher acceptance rates for people with a poor credit file than mainstream credit options, and you may still qualify for a small overdraft even if your previous borrowing history hasn’t been great. In both cases, you will be subject to a creditworthiness and affordability assessment to make sure you can afford the repayments. As credit lines and overdrafts can have small credit limits (you can ask to have your credit limit decreased with both facilities), they remain reasonable options for occasional or short term borrowing, even if you have a poor credit history.
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