What are they?
Your bank lets you carry on spending money when there’s none left in your current account – this negative balance becomes your overdraft.
Going overdrawn – or “getting into the red” – might be the unwelcome result of your miscalculations, but don’t forget that overdrafts are profitable products for banks, because of the fees and interest they earn from them.
First rule of going overdrawn…
If there’s any danger you might, contact your bank to arrange an authorised overdraft. This will have a certain limit and rate of interest, and there’ll be other fees, such as a monthly fee of, say, £5.
If you go into the red without arranging it first, this will be called an unauthorised overdraft. The rate of interest will be much higher – as much as 30% a year. And that’s not the end of it – other charges could include a £30 fee and extra fees if direct debits or standing orders aren’t honoured.
Are overdrafts a good way to borrow?
They’re certainly convenient. It’s easy to set up an overdraft facility, and while it lasts you can dip in whenever you want and pay it back whenever you can.
But you pay for this convenience. The interest rates on authorised overdrafts are higher than on personal loans, though they’re lower than on credit cards.
If you find you often go overdrawn at the end of the month, try to nip your borrowing habit in the bud. Take a look at our guide and get your money back in control.
The content of this article is intended for general information and personal use only. Nothing in this article should be construed as advice under the Financial Services and Markets Act 2000.
©2008 Rachel’s Guide to Money