An overdraft is another form of taking out a loan, allowing you to spend money that isn’t yours if you ever run low on cash. Although an overdraft is there as a safety net in case you are ever low on money, it is an expensive alternative to a loan.
Most bank accounts nowadays have an overdraft facility that either comes with the account or can be negotiated with your bank. Some banks, however, do not offer an overdraft even though the account has the facility attached. These banks call any use of the overdraft ‘unauthorised’ and will charge a fee of up to £80 a month for its unauthorised use. Even an authorised overdraft has its limit, and a bank will also charge you if you overspend on an agreed overdraft limit.
There are some accounts that offer interest free overdrafts, such as a student current account. These do not accrue costs on spending in the overdraft, but you must satisfy certain criteria in order for your application to be approved.
Always check on your account balance as often as possible to make sure you aren’t creeping down towards your overdraft. You can do this online, over the phone, or in person; you can even have your bank text you when you reach a certain balance.
Do I need an overdraft?
This is an important question to ask yourself before applying for a bank account. An overdraft is an easy way to get yourself further and further in debt, so it may be worth applying for a bank account that does not offer an overdraft facility. Whilst an arranged overdraft can be useful as a cushion to prevent rejected direct debits and further debt, it should not be used as a long-term solution for your finance troubles. Finance experts recommend that you only use an overdraft in emergencies, because even authorised overdrafts charge fees or interest.
The amount that you are overdrawn affects the fees and interest that will be charged against your account. Always check with your provider, either on the phone, in person at your local branch, or online, to find out the daily, monthly, or yearly fees, and interest they charge.
If you overspend on your overdraft above the agreed limit, or spend in an overdraft when the bank has not offered one, you can be charged for ‘unauthorised’ use of an overdraft. It is always best to avoid this as the fees can be extremely high.
An ‘unauthorised’ overdraft can incur many fees, from transaction fees, around £10-£25 which can be charged with each transaction, to regular daily or monthly fees for as long as you remain over your limit.
Always check with your provider as to what fees will be charged to your account before sending an application.