Every penny counts, especially if you’re overdrawn. Don’t pay more than you need if you’re regularly in the red. Overdraft costs vary significantly so compare accounts now and make sure you’re getting the best deal….
What is an overdraft?
Most current accounts offer an overdraft facility which means you can spend more money than you have in your account. This can be useful if you have an expensive month or receive an unexpected bill just before their pay cheque is due, for example.
For most people, a bank overdraft works as a buffer to protect them from bouncing cheques and failed direct debits if they run out of cash during the month.
Who do they suit?
Bank accounts with an overdraft can be helpful for a variety of situations. For example, a student might use a generous undergraduate overdraft facility to help fund their degree, while a self-employed contractor might use their bank overdraft to meet their bills while awaiting payment.
Even if you don’t need an overdraft generally, you will usually be offered one when you switch current accounts, simply in order to shield you from the risk of defaults and unauthorised overdraft charges while your salary is moved over.
The cost of going overdrawn varies hugely though so if you do regularly go into the red, it’s well worth looking for a current account that offers a competitive overdraft rate.
Current accounts with overdraft facilities can give you greater flexibility in managing your money. For some, they provide a much-needed additional resource to dip into when things are tight. A current account overdraft will ease the pressure if there is little room for manoeuvre when it comes to your income and outgoings.
Some current accounts offer interest-free overdraft buffers – up to £200 or £250 - which can be great if you only go overdrawn by a small amount. However, if you go into the red by more than that you will have to pay for the privilege.
Although some bank overdrafts are interest free – particularly student accounts – most will charge interest or a flat daily fee for those times when you dip into the red. Some accounts charging a daily fee cap their overdraft fees at a set amount a month, whereas others will charge you for every single day. That means it’s essential to compare current account with overdrafts and find the best and cheapest deal for you.
You won’t automatically qualify for an overdraft however, so don’t assume you can just slip into the red as and when you want. The charges are steep for going overdrawn without permission – you could be charged up to £35 for every transaction that is processed and you will probably pay a higher rate of interest, or a higher daily fee. These fees and higher rates also apply if you exceed an agreed overdraft rate without authorisation.
It’s therefore really important to speak to your bank and ensure you have an overdraft facility in place if you think you might need it.
However, you should also be aware that you may not qualify for an overdraft, or you could be offered a lower limit than you were hoping for. Your bank or building society will run a credit check on you if you ask for an overdraft facility and any decision will depend on any your past history of managing credit and also whether you have any other outstanding borrowing on things such as loans and credit cards.
If you have a poor credit history you may struggle to qualify for an overdraft.
A credit card or loan may be worth considering as an alternative to an overdraft.
If you don’t need an overdraft facility, then focus on other features when choosing a current account, such as how much interest you’ll earn on your balance in credit.