Credit cards, loans and overdrafts

Borrowing comes in several everyday forms, and each behaves differently. Knowing how the common ones work helps you pick the right tool — and avoid the expensive ones for the wrong job.

A credit card lets you borrow up to a limit and repay flexibly. Used well — clearing the balance in full each month — many cards charge no interest at all, effectively giving you a short interest-free float and sometimes rewards. Used badly — carrying a balance — they're among the most expensive common borrowing, with high APRs and the minimum-payment trap. The card itself is neutral; how you use it decides everything.

A personal loan lends a fixed amount over a fixed term at a fixed monthly repayment. Because the rate is usually lower than a credit card's and the end date is fixed, loans suit larger, planned costs you'll repay over time — and the fixed schedule means the debt actually gets cleared, rather than lingering. The trade-off is less flexibility: you commit to the repayments.

An overdraft lets your current account go below zero up to an agreed limit. It's convenient for short, small gaps, but arranged overdrafts can carry high rates, and unarranged ones (going over without agreement) can be very costly. An overdraft is best as an occasional buffer, not a way of life — persistent overdraft use is often a sign a budget needs attention.

Why this matters for you. Matching the borrowing to the need saves money: a card cleared monthly for convenience, a loan for a big planned cost, an overdraft only as a rare buffer. The expensive mistakes come from using the wrong one — like carrying long-term debt on a credit card that a cheaper loan would have cleared faster.