What Is Wrong With My Overdraft?

We all know what it's like... despite all the careful budgeting that happens during the month, and avoidance of spending too much money, unexpected bills always seem to arise at the last moment - and suddenly our outgoings are in danger of exceeding those in-goings for the month!

There are various options to consider when you need to make up a shortfall, and one of the 'default' options that people tend to end up using is to 'go overdrawn' using their overdraft facility. An overdraft facility is attached to a current account, and it acts as a buffer for those occasions when you go into debit on your account. Often a portion of this buffer - say the first £100 of overdraft is either fairly cheap or even free - but then generally the charges are quite high. The overdraft charges basically are credit facility charges and they may be expressed as an APR - say 8%, or a flat charge per day of being overdrawn within a pre-agreed limit. Student or graduate accounts may have more competitive overdrafts attached, as banks hope that these students will be high paying and investing customers in future! Some other general accounts also offer introductory benefits such as free or cheap overdrafts for a certain period of time.

The agreed overdraft limit is important and will be agreed when you open the account then possibly reviewed at certain periods whilst you hold the account. You can also request to have your overdraft extended if you know you will need to use it. This may be accepted if you have a good repayment record and don't continually live in your overdraft! The agreed limit will be charged at a pre-arranged APR - much as a credit card or Loan.

However, if you exceed your pre-arranged overdraft and overextend the facility, you may find yourself penalised with some heavy charges. These can be as excessive as £25 - £30 per day from some high street banks, up to three days consecutively that the overdraft limit is exceeded. However these charges are being reviewed for their legality in the High Court, as they have been challenged by the FSA and consumers for being too high, and representing far more than the bank's internal costs of adminstering the exceeded overdraft. You will of course also be penalised with the credit charge during the overdraft use period, possibly at a higher rate than for the agreed portion of the overdraft facility.

People may wish to use an overdraft as a short term loan until payday, but the amount of facility available will depend on their history with the bank and their own credit record. There are other options for short term - and certainly long term loans which may be more suitable for your needs. It's worth doing your research fully into alternatives, to avoid those excessive overdraft charges and fees!

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