Most of us have one, or have had one in the past (insert your own joke here) – but overdrafts are a financial way of life for Brits. But, they are just like any other debt – but seem less dangerous.
They are great to get you out of a bind if you need a bit of extra cash before payday, but living in an overdraft (and hands-up, that’s been me in the past) can and will cost you a fortune.
If you have a bank account with an agreed set amount of overdraft – that’s an authorised one. But if you go over that it quickly becomes an unauthorised overdraft and you can expect some fees to come your way
There are three types of unauthorised overdraft fees
- Monthly fee – anything from £5 to £35 or more
- Daily fee – can be £1 to £6 a day or more (usually up to a set limit per month)
- Transaction fees – can be £10 to £25 for every cash withdrawal, direct Debit or standing order, cheque or card payment you make – whether or not your bank allows the payment.
So here are my top tips to avoid getting stung by a rubbish overdraft:
Read your bank’s letters
I’m as guilty of this as anyone – you get a load of letters, spot one from your bank and assume its a boring update or pamphlet trying to sell you a loan.
But the truth is, those updates are important! If the bank changes your overdraft limit or plans to increase your overdraft fee – that’s how you’ll find out.
Switch banks (and get paid £150)
Switch to an overdraft-friendly bank account with better rates (ideally 0%) and get paid for it while doing it!
And sure, it sounds like a proper faff – but its really not. It will take you seven days, a few forms and could possibly save you a fortune.
Check out my How to switch your bank account guide.
Gone over and have been charged? Call up and ask for your money back
This depends on your bank, and won’t work if you go over a lot – but the bank can refund you back the charge.
Years ago when I lost my first job, a payment went out of my account and I was charged £30 – which I just didn’t have.
I called up in tears and explained my situation. To my surprise, the bank agreed to give me the £30 back and said they can do this about once a year.
Repay your highest rate debts first
If you have a few different debts (including an overdraft), write a list of what you now, then see which costs most, adding up interest and fees for true costs.
If your overdraft’s the most expensive, make minimum payments on other debts to focus incoming cash on your overdraft. You could open a basic account for day to day banking, then repay your overdraft lie a credit card.
Once the most expensive debt is cleared, you’re ready to tackle the next, and so on.
If you have savings – use them
If you’re saving cash (no matter how small) – I’d generally say you are being financially savvy. However having expensive overdrafts and savings at the same time just isn’t sensible.
Debts generally cost more than savings earn – so take the money you’re saving and pay off the debt. Once that is sorted, get saving again.
Get a no-overdraft account
The easiest way to avoid going over your overdraft, is to not be able to have one at all.
Consider a basic bank account (especially if you’re likely to go over your limit), as they provide a no frills, no overdraft current account service.
You’ll still need ID and to be credit checked though!
Beware – your bank overdraft could be taken away
One reason that an overdraft isn’t safe for long-term borrowing is that it’s not guaranteed.
The bank could withdraw it at any time and leave you without the cash you thought you had access to – so don’t live in your overdraft. Get out of it as soon as you can – check out my 4 simple steps to start getting your finances under control guide.
However, if your bank cancels your overdraft with no warning and you incur charges as a result, you may have grounds to complain. If you complain to your bank and you aren’t satisfied with the outcome, you can take your complaint to the Financial Ombudsman Service.