A guide to overdrafts
A guide to overdrafts
An overdraft can be a safety net for emergencies or necessities and if you use it sensibly it will not impact your credit score. Here’s what you need to know…
What is an overdraft?
An overdraft is simply when you agree with your bank that your balance can go below zero up to a set limit. This allows you to withdraw more money than you have – meaning that you now owe the bank money.
When you go into your overdraft you’re getting into debt and it should only be used for short-term borrowing or emergencies. It’s important that you manage your debt and avoid going over your limit in order to prevent additional bank charges.
How does an overdraft work?
An overdraft will allow you to borrow money through your current account and it is subject to application and approval. Your bank will agree on an overdraft amount and the limit will depend on your income and outgoings, as well as your credit score. This agreed limit is your arranged (or authorised) overdraft.
There’s usually no cost involved in putting the facility in place. If you don’t use your overdraft facility, then you won’t be charged for having it.
How is an overdraft useful?
Overdrafts can be useful in the event of a short-term shortfall in funds. For example, you get a puncture and need to replace a tyre– you haven’t budgeted for this so you use your overdraft to tide you over until pay day.
When it comes to what it will cost you to use your overdraft facility, there’s a big difference between being accidently overdrawn and having an arranged, authorised and planned overdraft in place.
What’s the difference between an arranged and unarranged overdraft?
Arranged overdraft: this is agreed by your bank. You’re entitled to go into your arranged overdraft up to the agreed amount. For example, if your arranged overdraft limit is £1,000 and you have £200 in your account but spend £450, you’d be £250 into your overdraft, leaving you with £750 arranged overdraft available. How much using your arranged overdraft will vary (see our handy guide below.)
Unarranged overdraft: if you go over your arranged overdraft, you’ll be in unarranged (or unauthorised) overdraft territory and could face some hefty charges. It could also mean that any outstanding direct debits or standing orders are likely to bounce and not go through.
Unarranged overdrafts come with lots of different fees.
Monthly fee: anything from £5 to £35 or more.
Daily fee: can be £1 to £6 a day or more (up to a set limit per month).
Authorised overdraft fees
Most banks will charge you a fee and interest when you use your overdraft facility, which can vary between banks and account types.
The charges below reflect the costs of using your planned overdraft, however some banks offer a free planned amount (if you have a good credit score). If you were to go over your planned overdraft into an unplanned (unauthorised) overdraft then fees would be much higher.
Note that all overdrafts will be subject to application and approval. Some current accounts may contain a fee free overdraft but you pay a monthly fee to have the current account and access to its benefits.
Do you need an overdraft?
If you need to borrow money, it’s important to find the cheapest way to do so. Due to the size of these fees, it’s probably worth using your overdraft facility as short-term funding and it should only be used for emergencies. If you’re likely to be overdrawn for any length of time, it might be worth looking at another form of credit, such as 0% credit cards.
If you’re a student, talk to your bank about which overdraft facility your account has. Many banks have special student accounts that cater to students needing an overdraft.
Compare current accounts
Use our comparison tool to compare current accounts across the market, taking into consideration whether an overdraft is something you might need and something you’re able to pay off.