Credit card versus overdraft debt

Brits running out of cash before pay day could be stacking up high interest by misjudging the way they use their credit cards and overdrafts as a backup, according to research from MoneySupermarket.com.

The comparison site asked consumers where they turn when they run out of money, and found savings, authorised overdrafts and credits cards are the top three ‘go-to' resorts for backup cash. Over a third (38 per cent) dipped into their savings when they ran out of money, and 29 per cent used an authorised overdraft to boost their cash flow. In addition, a quarter (25 per cent) used a credit card to tide them over until the next payday. The results also found 20 per cent borrowed money from friends or family and eleven per cent extended an overdraft limit. Four per cent used a pay day loan when running out of money.

MoneySupermarket also calculated the additional amount in interest those turning to credit cards and overdrafts would pay, and found someone using their authorised overdraft (after introductory offers) of £500 for one day with Halifax would accrue interest of £4 in a month, or £48 in a year. The amount of interest rises to a huge £300 if the same debt is left for 30 days, over half the original amount ‘borrowed'. However, compared to an average credit card rate of 17.31 per cent (once introductory offers had expired) spending £500 would incur a charge of £6.70 of interest over a month, or £75.46 in a year if only minimum repayments each month were made.

Kevin Mountford, head of banking at MoneySupermarket.com said: "Many consumers are struggling to keep their heads above the water due to the high cost of living. The high number of people turning to their savings pots as a backup for extra cash is reassuring, given times really are tough. However, for those relying on credit cards or their overdraft as a fall back until pay day, as our findings show, it really does pay to research your options and think about the additional interest you could end up forking out beforehand. A balance transfer credit card could be a good option for those with existing debt on other cards, for example a zero per cent card such as Barclaycard's Platinum Credit Card with extended balance transfer offers 22 months interest free on transfers."

Women are more likely to fall back on their savings pot than men, with 40 per cent saying they have done so in the past compared to 35 per cent of males. Those unemployed said they have borrowed from friends and family first (35 per cent).

Kevin Mountford continued: "For those who are continually struggling to stay out of the red before pay day each month, I would advise spending a few minutes to check through all outgoings, in order to work out where savings can be made. Reviewing your personal finances to see where savings can be made can help you release vital cash which can help alleviate the financial pressure."