Bank Overdrafts

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What is an overdraft?

An overdraft allows you to easily borrow money through your current account without having to apply, although you will be charged for this privilege, and often the fees are incredibly hefty. Most accounts automatically come with an overdraft allowance, although you may have to request one from your bank specifically.

What are the different types of overdraft?

Authorised overdrafts: This is an overdraft that is arranged in advance allowing you to spend money up to a certain limit. You will be charged a fee on this which could be daily, weekly or monthly.

When should an overdraft be used?

Overdrafts work well if you are looking to borrow a small amount of money over a small period of time. However, they are not suited to large amounts for long time periods as interest can mount up exceptionally easily.

Unauthorised overdrafts:

These are also known as unplanned overdrafts and happen when you spend more than you have in your bank account without agreeing to this with your bank in advance. These can become very expensive and fees can quickly spiral ranging between £5 and £6 a day.

Tips for controlling your overdraft

  1. Keep an eye on your bank balance. This is tremendously easy now as even the most traditional banks have online banking. Tracking your spending online allows you to check your balance on a daily basis and you can even receive text alerts when your bank balance is dropping.
  2.  Speak to your bank. If you do need to extend your overdraft and are upfront and honest about the reasons why, most banks will be sympathetic to your situation. This can be as simple as picking up the phone and asking for your limit to be temporarily increased. If you have already gone over you balance, you could also ask your bank to waive the fees.
  3. Use your savings. If your choice is either going into your overdraft or using your savings, using your savings is most often a far more cost-effective option.
  4. Switch Banks. Some banks offer interest-free, fee-free overdrafts from £100-£300. You may also be able to switch to an account with a bonus that could help you clear your overdraft.
  5. Read letters from your bank. Your bank reserves the right to withdraw your overdraft at any time. Therefore, make sure to read through all mailing material from your bank to make sure you have a realistic understanding of your rights.
  6. Get a prepaid debit card. If stopping yourself from dipping into your monthly overdraft is proving too challenging a feat, then consider the use of a pre-paid debit card. These cards aren’t linked to your current account which means that you can’t simply spend money that isn’t pre-loaded onto the card. Instead, it will get declined – allowing you to be more certain about keeping your finances in check.

What are the alternatives to a bank overdraft?

If you find yourself falling into the red on a monthly basis, it may be necessary to re-examine your finances and see if there are ways you can lessen your spending.

Budgeting more carefully: Spending in line with your earnings is a vital part of any solid financial plan and can ensure that you avoid even needing to dip into your overdraft. For some more helpful tips on budgeting please do take a look at our blog on effective budgeting here.

Using your credit card: A credit card may well offer more favourable interest rates than an overdraft, especially as you often receive an interest-free grace period of up to two months on a credit card.

Will having an overdraft affect your credit rating?

If you regularly dip into your overdraft and aren’t able to pay it back quickly, this will have a negative impact on your credit rating. In terms of your financial options for the future, this may mean that lenders could be much less likely to approve you if you are looking for a loan.

Can I switch banks if I have an overdraft?

Yes, you will simply apply for a new overdraft with your new bank and the decision will be made based upon your creditworthiness. Essentially, this involves the bank assessing your credit rating based on your past and current financial status including any loans that may be outstanding or have been paid back late. Once the bank has determined your credit score you will then be offered a set rate on your overdraft.

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