Why your overdraft could be more dangerous than your credit card

When we think about risky debt, credit cards usually come to mind first. They have high interest rates, tempting minimum payments, and the potential to spiral out of control. But there’s another type of borrowing that’s often overlooked - your bank overdraft - and in some cases, it can be even more damaging than a credit card.

Millions of people rely on overdrafts to cover short-term gaps in their finances. On the surface, they seem convenient.  You can pay bills or buy essentials even if your account is empty, and you avoid the embarrassment of declined payments. But while overdrafts can help when money’s tight, they also come with risks that many people don’t fully realise.

1. Overdrafts can sneak up on you

Unlike credit cards, where you get a clear statement showing interest, minimum payments, and total debt, overdraft charges can be confusing. Many banks offer arranged overdrafts with interest or fees, but if you go over your limit, you can be hit with higher interest or declined payments.

Because overdrafts are often used to cover everyday expenses like food shopping or utility bills, it’s easy to grow debt without noticing. And you might not see the total ticking up until your account is deep in the red.

In contrast, credit card balances are usually more transparent. You see your monthly statement, interest rates, and how much you need to pay to avoid charges. With overdrafts, the combination of fees and interest can quietly mount, catching people off guard.

2. Interest and fees can add up faster than you think

Arranged overdrafts in the UK often charge interest at a rate of around 15-40% APR, depending on your bank. If you also use an unauthorised overdraft, fees can stack up quickly.

Compare that with a credit card. While credit cards may have APRs around 20%, most offer a grace period on new purchases. That means if you pay your full balance each month, you can avoid interest entirely. Overdrafts don’t have this luxury - every day you stay in the red costs you money.

Find out about persistent debt here.

3. Overdrafts can affect your credit score

Many people assume overdrafts don’t impact their credit score - and in some cases, that’s true. Arranged overdrafts are reported to credit reference agencies, but only if you consistently use them or go over the limit. But unauthorised overdrafts, missed repayments, or accounts sent to collections will appear and can harm your credit.

With credit cards, late payments or maxed-out balances are reported more immediately and consistently. But because overdrafts are so flexible and often invisible in small doses, people can sometimes let them creep up - and then suddenly face a large balance, fees, and potential damage to their credit score.

4. Why overdrafts can be more dangerous than credit cards

The key danger of overdrafts is how invisible and easy-to-use they are. You can spend £20 here or £50 there, not feeling the impact until the end of the month. By then, fees and interest can have quietly inflated your debt.

Meanwhile, credit cards force you to face the total debt monthly. You can see the balance, the interest, and the minimum payment required. Overdrafts hide the problem, making it easier for small spending slips to snowball into a serious debt trap.

Additionally, many people rely on overdrafts for essential payments, like rent or food shops. Missing these or using overdrafts to cover day-to-day essentials can create financial stress that’s immediate and ongoing, which can worsen mental health and lead to more borrowing, which is a vicious cycle.

5. How to protect yourself from overdraft debt

Check your interest rate and fees

Always check the interest rate your bank charges for overdrafts before you use it. Most banking providers now charge a single APR for overdrafts rather than separate daily fees, and this rate can be high, often around 40% or more depending on your account. Knowing the exact cost helps you plan repayment and avoid unnecessary charges.

Stay within your arranged overdraft limit

You should also know exactly what your arranged overdraft limit is and try to stay within it whenever possible. Going over your agreed limit or using an unauthorised overdraft frequently can be reported to credit reference agencies and could harm your credit score.

Pay off your overdraft quickly

Another important step is to pay down your overdraft as soon as you can. Paying off your balance reduces the amount of interest you pay, lowers your overall debt, and improves your credit utilisation - all of which support a healthier credit profile.

Use alerts and budgeting tools

Set up notifications through your bank app or online banking to warn you when your balance is getting low. This can help to avoid accidental overdraft use. If you find yourself relying on an overdraft regularly, use our free online budgeting tool to help you get on top of your money. And if you’re worried about debt, we can help you find the right solution or see if you’re missing out on an income boost.