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What Is An Overdraft and Is There A Good Way To Use One?

Credit by any other name

With most bank accounts you are automatically entitled to an overdraft. So what are they and is there a good way to use one?

Self control

An overdraft is simply a way of the bank allowing you access to extra money that you can borrow when you have run out of funds. Overdrafts are very convenient, but you will need to talk to somebody about arranging one before going overdrawn. Don’t automatically assume that you will be granted one.

If you don’t talk to the bank first then you will become liable for some very hefty bank charges and interest as you will be using what they call an ‘unauthorised overdraft’.

The annual interest on an unauthorised overdraft can be as high as 30% and typically you will be charged a £25 fine for using the overdraft facility without arranging it first. Interest at 30% is higher than even credit cards charge, so a short phone call or a trot down to your branch will save you a substantial sum.

Once you have the overdraft in place it will be very tempting, over a period of time, to keep gently nudging it to a larger and larger amount. Again, in consultation with your bank, you will find after a period of time that they will in fact extend the amount of the overdraft. There will of course be a limit; usually it’s a figure that’s worked out in relation to the monthly sum flowing through the account.

Easy come, easy go

An overdraft is probably the easiest form of borrowing around; it’s even easier than credit cards and consequently it usually carries the highest fees and interest rates.

By far the best policy is to keep your bank account sitting nicely in the black, in credit, so that you don’t actually owe the bank any money at all. But it’s not easy.

Free overdrafts

If you are a student you should be able to get a bank account that doesn’t charge you either interest or levy charges against you, unless you go over your overdraft limit.

As soon as you leave full time education, however, you become eligible for charges and these will be a bit of a shock as the interest rate will be in the region of 20% and you may also receive a monthly administration fee of £5.00 on your account. Those banks will always get their money back somehow!

Over the top

It’s really important to keep a track of your money when you are close to the limit of an overdraft. The penalties you will suffer if you exceed your limit even by accident can include not only the one-off fee for going over, but you will also get the additional high interest rate and some banks will charge in the region of £30 a transaction for every item whilst in unauthorised borrowing!

Research has shown that typically people with overdrafts actually end up spending something like £100 a year in additional charges simply by losing track of how much money they have in their account.


Banks are always being lambasted for over charging. Recently a Labour MP, Angela Eagle, even described these overdraft penalties as ‘suspicious’ after a House of Commons Treasury Select Committee declared Banks were exploiting the charges to improve their profits. These charges bring the Banking industry a cool £1.3billion each year.

One Way Street

It would seem that there is not a good way to use an overdraft.

They are, however, very convenient but we pay through the nose and, if common sense ruled the planet, we should never go near them. But common sense doesn’t dictate our every move and undoubtedly overdrafts will always be around.

The only thing we can do is to keep a close eye on how much we have in the overdraft and take satisfaction in keeping our accounts on the right side of the authorised line.

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