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An overdraft is a credit product that gives you the option to spend more money than you currently have in your bank account.

Most banks offer overdrafts however the terms and conditions will be unique to your account and will depend on your creditworthiness. Overdrafts can be suitable for covering short-term expenses but they can quickly become expensive if you borrow a large amount of money over a long period of time. As with other forms of credit, using an overdraft will be recorded on your credit file and may affect your credit score.

The first overdraft was set up in 1728 by the Royal Bank of Scotland for the merchant William Hogg. This made him the first ever recipient of credit from a bank. Mr Hogg was struggling to repay his debts, so he arranged with the bank to withdraw money from his empty account and repay it after he received his wages. The advantages of this form of credit meant that it was soon widely adopted by banks across the United Kingdom.

There are two types of overdrafts: arranged and unarranged.

Arranged overdrafts are set up in advance and give you the option of using extra money, up to a fixed amount, at a set interest rate or fee.

Unarranged overdrafts are not agreed with your bank in advance and may result in extra charges on your account. The fees and interest on an unarranged overdraft can often be very high.

How does an overdraft compare to a credit line?

Both an overdraft and a credit line can be used as an ongoing form of credit and your credit limit will be dependent on your credit score rating.

With a credit line, you will need to make a minimum repayment each month to comply with your credit agreement.

We created the Polar Credit Line to provide you with access to credit in a fast, easy and transparent way. Polar Credit is a revolving credit facility that can help with your monthly expenditure. Find out more here.

Other options

There are many different types of credit products available on the market and some will be more suitable than others for your circumstances. If you’re unsure about using an overdraft, you could also consider these other forms of borrowing:

More information

About Polar Credit

What is a credit line?

How would I benefit from a credit line?

A Beginner’s Guide to Credit Scores

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