OverdraftsExplained
When you go into your overdraft, you’re getting into debt. An overdraftshould be for short-term borrowing or emergencies only. It’s important youmanage an overdraft like any other debt to make sure the costs don’t get out ofhand. This guide looks at how overdrafts work, how to stop going over yourlimit and how to avoid bank charges.
How Does an Overdraft Work?
An overdraft lets you borrow money through your current account by takingout more money than you have in the account. There’s usually a charge for this.
You can ask your bank for an overdraft – or they might just give you one –but don’t forget that an overdraft is a type of loan. If you need to borrowmoney, there might be cheaper ways to do it. It’s important to always find thecheapest way to borrow.
Types of Overdraft
Authorised overdrafts: are arranged in advance, so they’re also known as‘arranged’ overdrafts. You agree a limit with your bank, and can spend money upto that limit. Your bank will charge you interest, and sometimes other fees ontop.
Unauthorised overdrafts: these are also known as ‘unplanned’ or‘unarranged’ overdrafts and happen when you spend more than you have in yourbank account without agreeing it in advance. This includes going over the limitof an authorised overdraft.
Recent Overdraft Changes
Major changes affecting your overdraft were introduced in April 2020. Banksused to charge higher fees for unauthorised overdrafts, but from April 2020they won’t be able to.
Interest on all overdrafts will be charged at a single annual interest rate(APR), making it easier to compare charges between accounts.
Interest rates from banks and building societies on their overdrafts rangefrom 19% to 40%.
If you’re worried, unsure or think you’ll be worse off because of thesechanges, then:
1. Speak to your bank or building society as soon as possible. They canhelp explain your overdraft and, if you’ll be worse off, consider how it canhelp you during this change.
2. If you feel vulnerable for any reason, explain your circ*mstances andyour provider is obliged to take this into consideration.
3. If these changes mean you’ll struggle to pay bills or fall into debt, oryou are already in debt, you should find help as soon as possible.
Do You Need an Overdraft?
Overdrafts can be useful for some people. They can help you avoid fees forbounced or returned payments. These happen when you try to make a payment butyour account doesn’t have enough money in it.
But overdrafts should only be used for emergencies or as a short-termoption.
If you’re using your overdraft a lot, read our tips below on how to avoiddoing this. They could help you save money. If you find you’re constantly inyour overdraft and don’t have the money to pay it down quickly, it may be cheaperto borrow using a personal loan or 0% credit card.
The Financial Conduct Authority (FCA) found that many people underestimatehow much they use their overdrafts. If you’re using your overdraft more thanyou think, it could be costing you more than you realise.
Tips for Controlling Your Overdraft
Keep an eye on your account balance. It mayseem obvious but keeping track of your account balance is one of the best waysto avoid overdraft costs. Make it as easy as possible by: downloading yourbank’s app on your phone; setting up text alerts for when your balance is low; usingphone banking.
Keep reading your bank’s letters. It’seasy to get in the habit of not opening letters from the bank and assumingthey’re just routine correspondence. It’s important to check all letters as thebank might be writing to tell you about a change to your overdraft limit orincrease to your overdraft interest rate.
Use savings if you have some. If you have savings aswell as an overdraft, it’ll be cheaper in the long run to use your savings topay it off. If you then get an unexpected cost, you can still use youroverdraft to pay for it. And if you don’t, you can start building up yoursavings again, so you’re ready for that unexpected expense.
Find ways to live on a budget. To lower your overdraft asquickly as possible, cutting back in other places will help you free up money.The money you save can then be used to pay off your overdraft.
Switch banks. Switch to a bank account with lower overdraftcharges. If you often dip into your overdraft shop around for one with thelowest charges. You may even be able to switch to an account with a switchingbonus, which will help you to clear your overdraft.
If You Think You’ve Been Charged Unfairly
If you’ve been charged fees you think are unfair, or if you’re reallystruggling to pay, you might be able to get them back.
Don’t go to a claims management firm though – it’s easy and just aseffective to do it yourself, and you won’t have to pay someone else.
Beware – Your Bank Overdraft Could Be Taken Away
One reason that an overdraft isn’t safe for long-term borrowing is thatit’s not guaranteed.
The bank could take it away at any time and leave you without any money.
However, if your bank cancels your overdraft with no warning and you arecharged as a result, you might have grounds to complain.
If you complain to your bank and you aren’t satisfied with the outcome, youcan take your complaint to the Financial Ombudsman Service.
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