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Tackling your debts

What's an overdraft?

Posted 23 January 2017

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Find out what you’ll need to look out for if you’ve got an overdraft on your account.

Borrowing from your bank might not seem like taking out credit in the same way as a loan or a credit card but it is still borrowing - and if you’re struggling to pay off what you owe, there’s no difference.

An overdraft is when you borrow money in your current account. It’s best used as a short-term way to borrow relatively small amounts of money as it can be quite expensive.

But do you really understand how an overdraft works and what can happen if you don’t have one arranged with your bank? We’ll take you through everything you need to know about overdrafts, including what to do if you’re struggling with yours.

Overdrafts – the basics

As we explained, an overdraft is when you borrow money from your bank, directly through your current account. This happens when you take out more money from your account than you had in it.

You might have to pay daily or monthly fees for using your overdraft and you will often have to pay interest on your overdrawn balance on top of those charges. And, depending on your account provider, you might even pay just for having an overdraft on your account, even when you’re not actually overdrawn.

Some banks and building societies will give you an overdraft ‘buffer’ – often around £10. If you go overdrawn by less than this amount, you won’t usually have any fees to pay – but you’ll usually have to pay money in the same day to clear your overdraft.

Authorised or unauthorised?

You can agree an overdraft with your bank before you go overdrawn. This is an authorised overdraft. You can’t do this on all current accounts and if you’ve had problems with managing credit in the past, your bank might not offer you this option.

If you go overdrawn without agreeing it with your bank first or you go over your authorised overdraft limit, you’ll go into an unauthorised overdraft, or unarranged overdraft. This is usually a more expensive way to borrow than an authorised overdraft, with more expensive charges and higher interest rates.

That’s why it’s important to pay attention to how much you’ve got in your current account. If you constantly find yourself dropping into an unauthorised overdraft, this will cost you quite a lot of money. See if your bank offers you the option to turn on text or email alerts when you’re close to going overdrawn – this could help you to stay in the black.

And if you find that you go overdrawn a lot, speak to your bank to see if you can set up an authorised overdraft. You’ll still have to pay for this but it’s usually a cheaper way to borrow from your current account.

If you’re stuck in your overdraft

Going in and out of your overdraft often doesn’t just work out quite expensive – it can also be a sign that you’re struggling with your finances. You might find that you need to drop into your overdraft for a few days before payday so you can afford your bills. Or if you’re really struggling, you might even spend most of the month overdrawn.

If you’re finding it hard to get out of your overdraft, you might need to take fresh look at your household budget. Keep a spending diary to see how much goes out of your account every month, and see if there are any areas where you could cut back. You could also see if you can make some extra cash to boost your income – that way, you might find it easier to afford all of your outgoings.

But if the reason you’re finding it hard to make ends meet is because you can’t afford your debt repayments, you might need some extra help. You can get free and confidential advice from a number of debt charities and you can also get in touch with our debt advisors to talk about your options. Scroll down to see the options you have to get in touch with them today.

by Emily Bancroft

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To find out more about managing your money and getting free debt advice, visit Money Advice Service, an independent service set up to help people manage their money.