Overdrafts
Oh no, gone overdrawn again? Here's how to understand overdrafts and keep on the right side of your bank manager.
The basics
As with all forms of credit, you must be over 18 years of age before you can apply for an overdraft. An overdraft is an agreed cash-borrowing limit that is arranged with your bank. It gives you a flexible way of managing your cash flow and can provide you with short term funds if you don't have enough money. An overdraft is not a loan. An example of when an overdraft can help you: you have an urgent phone bill to pay today but you do not have funds going into your account until next week. The overdraft will enable you to pay off the bill, without having the appropriate amount of money in your account. Do not go overdrawn if you have not arranged it with your bank. You will be charged a much higher rate of interest for unarranged borrowing, and may also be charged for any angry letters sent by the bank manager. It is very important that it is arranged with your branch prior to you spending money that you don't have. Call the bank if you think you're about to go unexpectedly overdrawn, they're more likely to be sympathetic if you warn them.
How do I arrange one?
You should talk to someone at your local branch. Some banks or building societies can arrange an overdraft through their telephone or internet banking service, if they have one.
What are the benefits of an overdraft?
It is ideal for borrowing money that you know will be replaced quickly when your salary or regular funds are paid into your account. However, it doesn't work out as good value if you are borrowing thousands of pounds in this way and never clearing your debts.
What are the disadvantages
- Some banks charge a fee for setting up an overdraft.
- Overdraft facilities can be withdrawn by banks or building societies at any time.
- If you go overdrawn before agreeing a limit with your bank you will have to pay additional charges. The amount charged varies from bank-to-bank.
- If you go overdrawn above the limit agreed with your bank you will also face higher charges.
- If you are overdrawn and decide to transfer your bank account you must pay off your overdraft first because you are in effect in debt to the bank.
Free or cheap overdrafts
It is worth checking if your bank has a buffer zone that allows you to go slightly overdrawn each month without incurring the high charges usually associated with unauthorised overdrafts. There may be a small annual charge for this facility. Some banks and building societies also offer preferential terms to students, which could mean that overdrafts attract reduced interest rates, or are free up to a certain amount.
Unfair charges?
If you go over your agreed overdraft limit, you may be charged a 'default charge', which can be anything from £20 to £40 for a single charge. Surprisingly, your bank should actually only charge you what it costs to cover their admin charges, however they often charge much more than this.
If you think the charges you've paid are unfair or too high, the Citizens Advice Bureau says you can ask your bank to refund them. For more information about how to claim back unfair bank charges, including a sample letter, check out the Financial Ombudsman Service website.
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