What is an overdraft? Uswitch explains


To arrange an overdraft, the bank usually charges a fee. From July 9, 2020, most banks will start charging an interest rate of up to 40%.

To learn more about how to organize an overdraft and what you should consider if you have one, read our guide.

What is an overdraft?

If you have an overdraft, it means your bank allows you to borrow additional money through your checking account.

So let’s say you don’t have any money in your checking account and you spend £ 50, that would make your current balance minus £ 50, and you used your overdraft to make this payment.

Using your overdraft is like using the money the bank lends to you, because it will be repayable. The type of checking account you have with your bank will determine the amount of interest you will be charged over a period of time. Such as 7 days, 30 days or 60 days, each bank will have its own charge, which they will inform you about.

There are two types of overdrafts, and the difference between them is essential:

Overdraft With an authorized overdraft, you have a fixed overdraft limit, which you set in advance with your bank. You will likely have to pay interest or fees in exchange for using the overdraft facility. The amount you will be offered as an overdraft will vary from person to person and is usually determined by your personal finances.

Unauthorized discovery This is where you did not agree on an overdraft facility with your bank in advance and withdraw more money than you have in your bank account, or withdraw more than your bank account. authorized overdraft limit.

Unauthorized overdrafts should be avoided, as they are often subject to charges and fees, which can be very costly.

When to use an overdraft

Overdrafts can be a good way to borrow small amounts of money for a short period of time. But most overdrafts are not a very effective way to borrow for the long term, as they may come with a higher interest rate than some. ready and even some credit card.

Even if your checking account is still in credit, it may be a good idea to have an overdraft facility with your bank.

Having an overdraft can be a useful buffer to protect you from unauthorized borrowing fees and charges if you accidentally spend too much or need a little extra cash.

Accounts with 0% interest charges are ideal for this kind of situation. It’s also a good idea if you’re trying to pay off your current overdraft. This will give you time to clear your current debt. However, it is important to remember that they only last for a certain time, for example a year, after which the interest rate can be quite high.

What to do if you are relying on your overdraft

If you are frequently overdrawn, or often overdrawn without authorization, you should really check to see if you are getting the best deal on your checking account, as you could be paying a lot more than you need in interest or fees.

If you have a large overdraft and can’t or don’t want to switch to a 0% overdraft account, you may want to consider converting your overdraft to a cheaper type of loan.

You might consider getting a Personal loan at a lower interest rate than what you pay on your overdraft.

Tips for controlling your overdraft

There are a few things you can incorporate into your daily routines that can help you stay on top of your spending and ultimately manage your overdraft.

  • Check your account regularly – tracking your spending can help you stay in control of your finances and pay attention to the proximity of your overdraft or the use of an outstanding overdraft.

  • Download the app from your bank – having easy access to your finances will make it easier for you to see what’s going on with your money. You can also set up notifications or alerts to let you know when you are about to be in the open

  • Read all letters / emails from your bank – when it comes to debt it can be easy to get your head in the sand. It’s important not only to know what’s going on with your account, but also to keep track of changes / bank charges.

  • Consider using your savings – if you have access to savings, it may be worth using your savings instead of going overdraft. This will prevent you from paying overdraft fees, arranged or not. The savings are also worth considering to clear your overdraft if the daily costs are high.


About Joan Ferguson

Check Also

4 reasons using a personal loan to pay off your credit card is a bad idea

Image source: Getty Images Should one debt be exchanged for another? Key points Personal loans …

Leave a Reply

Your email address will not be published.