A credit line is a financial product that allows you to borrow cash when you need it, up to a set credit limit. It is also known as a line of credit as it works on a revolving basis, like a credit card, and you are not required to re-apply each time you need to borrow. You only repay interest on the amount you have borrowed and not the full credit limit that you have access to, so it could be a great way to borrow sustainably and get money quick. Applications are usually submitted online and the cash is transferred to your associated bank account so you can access it using your existing debit card.
An overdraft is a type of credit facility provided by banks that allows you to withdraw more funds than you have in your account, up to a certain limit. The limit is agreed either when you apply for an overdraft or open an account with your bank. This is also known as an arranged overdraft.
Even if you do not have an arranged overdraft with your bank, it is still possible to borrow money using the overdraft facility your bank provides – also known as an unarranged overdraft. Except in this case, there is no agreement in place for you to withdraw money past your available balance.
Changes made by the FCA in 2020 to unarranged overdraft charges mean that whilst interest is still payable on the amounts borrowed, the interest is now much lower than it was prior to these pricing rules being implemented. You will usually need to pay interest for each day that your current account remains overdrawn whether you have an arranged or unarranged overdraft, and there is no set repayment date. However you should aim to repay the debt as soon as possible to minimise the cost of fees.
Overdrafts and credit lines can be considered personal line of credit loans. In both cases, you are given flexible access to funds which you can use, up to a set limit, as and when you need and interest is usually payable when using this facility.
With an overdraft, you are spending more than the amount that is available in your bank account. Your bank agrees to lend the funds to you on the basis that you will repay the money borrowed along with the interest on the amount borrowed. In the case of a credit line, the institution has agreed to lend you a set amount from which you can withdraw funds from at any time. You will usually be required to make either a monthly minimum payment or repay the amount borrowed plus the interest and transaction fees each month.
Getting an overdraft can sometimes be easier than getting a credit line as an overdraft is usually arranged with your bank. In some cases, your bank may have a set of criteria you will need to meet for them to approve an overdraft past a certain limit. In many cases however, you may already have a pre-approved overdraft limit with your bank so you may not need to undergo a thorough financial assessment or even a full credit check. In any instance however, you will need to be approved for it.
Applying for a credit line is not difficult, however it does require a more extensive process as you will need to submit an application which will come with a full financial assessment and a credit check. The application process is usually also very quick. Additionally, the institution may actually be in a better position to provide a more affordable credit limit which could mean you might be less likely to struggle with repayments in the future – provided your circumstances do not change drastically and you continue to borrow responsibly.
Overdraft facilities are usually considered for use in emergencies, so many banks do not offer a large overdraft limit and its use is therefore relatively limited to smaller unexpected items of expenditure. Comparatively, a credit line can offer access to larger funds, however this will differ based on creditworthiness and how much you are approved for.
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 are comparing different ways to borrow with your existing options. Whatever the reason, it is always important to research credit facilities before applying, so that you fully understand the terms and conditions and so that you know you are making a responsible decision.
To determine whether a credit line or an overdraft is best, 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 altogether 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 withdraw funds from a 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 a 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 have not previously considered.
Below, we take a look at the pros and cons of both a credit line and an overdraft.
Using a credit line can be a great way to build your credit file, particularly if you have not been able to access other forms of similar finance products – like a credit card for example. Provided your repayments are made on time and you are borrowing responsibly, using this service could positively influence your credit score, making access to other forms of credit easier in the future.
Applying for a credit line is usually a very quick online process. Once you have provided all of the requested information, the application can often be processed in a few minutes and, if you are approved, you can gain access to your credit line straightaway.
In today’s world where consumers are becoming more conscious of the environment and favouring a more sustainable way of living, using a credit line could be considered a worthy contribution.
In order to reduce the unnecessary use of extra plastic, Polar Credit does not provide a card – so the cash that you borrow from your Polar Credit Line is transferred directly into your existing current account, so you can access the funds using your existing debit card. We also use far less paper resources than some other providers as there is no physical transfer of paperwork required, given that everything is available online.
A credit line can be a great buffer for emergencies or when funds are needed quickly, or even during periods of an unexpected lapse in income for example. For some however, its revolving nature may increase temptation to spend more than is affordable and encourage unnecessary spending over time.
A benefit to some, while a disadvantage to others, the flexibility can be useful in helping to manage your personal financial needs, it can also be difficult to predict your monthly repayments, especially if the amounts borrowed largely vary each month. The more you borrow, the more you will need to repay and where emergencies may suddenly arise, and you need to draw more money out of your credit line at once, you may find yourself suddenly repaying more than previously anticipated.
Some credit line products can come with variable interest rates meaning that lenders are able to increase (or decrease) their interest rates at their discretion. If a lender is to increase their interest rates, you would end up repaying more interest than when you first took your credit line. It is therefore key that when searching for a credit line, you check the terms of their variable interest rates before applying and if you can find a credit line with a fixed interest rate that you are happy with, stick with it.
An overdraft is usually attached to your bank account and can be arranged by contacting your bank. Funds are available on demand, so it can be useful in helping to manage your cashflow more flexibly and with day-to-day expenses and emergencies.
As the overdraft facility is connected to your existing bank account, getting it added to your account is often a quick process once you have been approved. In most cases, you may not need to complete a new application and can usually call your bank to get it set up. If approved, funds are available almost immediately and you do not need to wait for a card to arrive before you can use the funds.
Whilst an overdraft can be handy for short-term use, it is usually not advised for large purchases or for longer-term borrowing as the daily interest means it can end up being more expensive than using an alternative credit facility that is better suited for your longer-term needs.
You can only get an overdraft with a bank where you already have a current account. If you wanted to apply for an overdraft with a different bank to get a better interest rate it would mean transferring your bank account or opening a new one. Though it is not the most difficult process, it can be time consuming especially when you need access to funds quickly. The bank can also choose to reduce your credit limit or request repayment at any time, though this might only occur if you are continuously using up or going over your arranged overdraft limit, and you do not have enough money regularly coming into your account.
The flexibility an overdraft offers can be useful in the event of an unexpected expense, however over time it may lead to unnecessary purchases, given the ease with which you can access funds. It can also take your bank some time to update your available balance so if you have made a number of transactions within a short period, you may be more likely to spend more than your overdraft allows which could lead to further interest charges.
Credit lines charge transaction fees to withdraw funds whilst overdrafts do not. At Polar Credit, the transaction fee 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 therefore cost more than 0% interest overdrafts but are similarly priced to fee charging overdrafts. You should always check the interest rates applicable before borrowing from either a line of credit or an overdraft to make sure you are aware of the total repayment costs in advance. At Polar Credit, we always provide transparent, upfront costs.
If you are 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 do not 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 has not 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.
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.
When using any form of credit, it is important to assess your financial circumstances thoroughly and ensure that you are not making financial commitments that you may struggle to uphold. An overdraft facility can be great for emergencies but might not be suitable for long term use as the interest can mean expensive repayments the longer you remain in your overdraft. It can also be more difficult to increase your overdraft limit with your bank if you have had difficulty repaying in the past. A credit line offers flexibility by enabling access to funds quickly for day-to-day cashflow but requires a full application and credit check before you can access funds. Your credit limit is also determined by your creditworthiness so you may not be able to access a higher credit limit if it looks like you might struggle to manage larger amounts.
As with anything, there are always pros and cons to consider before deciding to borrow. Assess your need for credit first, ensuring that whatever choice you make works for your own personal financial situation.
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