Overdrafts: oops, did you dip in again?

Dipping into your overdraft – is it a case of “oops, I did it again”? Overdrafts are one of the most expensive ways to borrow, so here’s why it’s not the best idea to OD on your OD…

An overdraft is basically a line of credit that’s offered by your bank and provided with your student or adult current account. The bank decides how much of an overdraft you’re allowed to have and it will usually charge for this service, though students do get a free overdraft to help them get by whilst they’re at uni.
 
Overdrafts are charged on an APR basis. APR stands for annual percentage rate, and this means that whenever you use your overdraft, there will be a percentage charge on the amount you borrow. This is typically around 40%, which makes overdrafts one of the most expensive ways to borrow money.
The risks with overdrafts is that they’re so easy to get into, very difficult to get out of and those charges really stack up over time.
 
It’s important to make sure that you’re budgeting and staying on top of your spending so you avoid using your overdraft if possible. Most banks will allow you to set up alerts if you’re getting too close to the limit – take advantage or switch if your bank is behind the curve.

If you’ve got a decent credit score, you might be able to switch to a bank account with a cheaper overdraft. Some banks like First Direct and Nationwide even offer free overdrafts but not everyone will get those, so another option might be a 0% money transfer card.

This is where you can pay a one-off fee of about 3-4% to get some cash paid directly into your bank account to clear your overdraft. Then the amount you owe is put on this card but at 0% so it’s a chance to pay off what you owe, usually over 18 months.

But to be honest, some people might just be able to find savings in their everyday spending and put that money towards paying down the overdraft every month.

That would be a very sensible idea considering how high overdraft charges are!

If you do have to use your overdraft, talk to your bank to make sure the overdraft is authorised because that won’t cost you as much as an unauthorised overdraft. Your bank might also agree to reduce or even waive your charges if you go into an overdraft by accident, and if you have an overdraft you’re struggling to pay off, speak to your bank about setting up affordable repayments.

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Iona Bain

Iona Bain

Iona is the founder and editor of the Young Money. She is now the UK's go-to voice on young personal finance.
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